[2010] UKFTT 296 (TC)

								TC00584

Appeal number LON/2008/1444

Value Added Tax – Import duty not input tax – Penalty failure to declare correct tax – Reasonable excuse – Misdirection 

FIRST-TIER TRIBUNAL
TAX CHAMBER

	ANGLO PERSIAN EMPORIUM TRADING CO LTD	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (Value Added Tax)	Respondents

				TRIBUNAL: 	MRS FIONAGH GREEN (Judge)

Sitting in public in London on 30 March 2010

Mr M Shokri, for the Appellant 

Mr J Holl HMRC, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	This is an appeal dated 27 June 2008 against an assessment in the sum of £12,925.00 for the period from 14 March 2006 to 31 August 2006 issued on 5 June 2008 and a notification of a penalty in the sum of £1,938.00 for failure to declare the correct amount of tax in a tax period 14 March 2006 to 31 August 2006 and mitigated by 50% of the sum £969.00 in a letter dated 10 September 2008.

2.	The Issues

Whether  -
(i)	the Notice of Assessment in the sum of £12,925 for the period from 14 March 2006 to 31 August 2006 issued on 5 June 2008 under the provisions of section 73 of the Value Added Tax Act 1994 was correct.
(ii)	there was a failure to declare the correct amount of tax in a tax period 14 March 2006 to 31 August 2006 and if so whether there was a reasonable excuse for the conduct leading to the failure to declare the correct amount of tax and 
(iii)	there was a misdirection.

The relevant legislation

3.	Value Added Tax Act 1994 (“VATA 1994”):

(1)	Section 73 VATA 1994

(1)	Where a person has failed to make any returns required under this Act (or under any provision repealed by this Act) or to keep any documents and afford the facilities necessary to verify such returns or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT due from him to the best of their judgment and notify it to him.

(2)	In any case where, for any prescribed accounting period, there has been paid or credited to any person –

(a)	as being a repayment or refund of VAT, or
(b)	as being due to him as a VAT credit.

an amount which ought not to have been so paid or credited, or which would not have been so paid or credited had the facts been known or been as they later turn out to be, the Commissioners may assess that amount as being VAT due from him for that period and notify it to him accordingly.

	(3)	An amount – 

(a)	which has been paid to any person as being due to him as a VAT credit, and
(b)	which, by reason of the cancellation of that person’s registration under paragraph 13(2) to (6) of  Schedule 1, paragraph 6(2) of Schedule 2 or paragraph 6(2) or (3) of Schedule 3 ought not to have been so paid.

may be assessed under subsection (2) above notwithstanding that cancellation.

(4)	Where a person is assessed under subsections (1) and (2) above in respect of the same prescribed accounting period the assessments may be combined and notified to him as one assessment.

(5)	Where the person failing to make a return or making a return which appears to the Commissioners to be incomplete or incorrect, was required to make the return as a personal representative, trustee in bankruptcy, interim or permanent trustee, receiver, liquidator or person otherwise acting in a representative capacity in relation to another person, subsection (1) above shall apply as if the reference to VAT due from him included a reference to VAT due from that other person.

(6)	An assessment under subsection (1), (2) or (3) above of an amount of VAT due for any prescribed accounting period must be made within the time limits provided for in section 77 and shall not be made after the later of the following – 

(a)	2 years after the end of the prescribed accounting period, or
(b)	one year after evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to their knowledge.

but (subject to that section) where further such evidence comes to the Commissioners’ knowledge after the making of an assessment under subsection (1), (2) or (3) above, another assessment may be made under that subsection, in addition to any earlier assessment.

	(7)	Where a taxable person – 

(a)	has in the course or furtherance of a business carried on by him, been supplied with any goods, acquired any goods from another member State or otherwise obtained possession or control of any goods, or
(b)	has, in the course or furtherance of such a business, imported any goods from a place outside the member States.  

the Commissioners may require him from time to time to account for the goods, and if he fails to prove that the goods have been or are available to be supplied by him or have been exported or otherwise removed from the United Kingdom without being exported or so removed by way of supply or have been lost or destroyed, they may assess to the best of their judgment and notify to him the amount of VAT that would have been chargeable in respect of the supply of the goods if they had been supplied by him.

	(8)	In any case where – 

(a)	as a result of a person’s failure to make a return for a prescribed accounting period, the Commissioners have made an assessment under subsection (1) above for that period,
(b)	the VAT assessed has been paid but no proper return has been made for the period to which the assessment related, and
(c)	as a result of a failure to make a return for a later prescribed accounting period, being a failure by a person referred to in paragraph (a) above or a person acting in a representative capacity in relation to him, as mentioned in subsection (5) above, the Commissioners find it necessary to make another assessment under subsection (1) above,

then, if the Commissioners think fit, having regard to the failure referred to in paragraph (a) above, they may specify in the assessment referred to in paragraph (c) above an amount of VAT greater than that which they would otherwise have considered to be appropriate.

(9)	Where an amount has been assessed and notified to any person under subsection (1), (2), (3) or (7) above it shall, subject to the provisions of this Act as to appeals, be deemed to be an amount of VAT due from him and may be recovered accordingly, unless, or except to the extent that, the assessment has subsequently been withdrawn or reduced.

(10)	For the purposes of this section notification to a personal representative, trustee in bankruptcy, interim or permanent trustee, receiver, liquidator or person otherwise acting as aforesaid shall be treated as notification to the person in relation to whom he so acts.

	(2)	Section 63 VATA 1994

(1)	In any case where, for a prescribed accounting period – 

(a)	a return is made which understates a person’s liability to VAT or overstates his entitlement to a VAT credit, or
(b)	an assessment is made which understates a person’s liability to VAT and, at the end of the period of 30 days beginning on the date of the assessment, he has not taken all such steps as are reasonable to draw the understatement to the attention of the Commissioners,

and the circumstances are as set out in subsection (2) below, the person concerned shall be liable, subject to subsections (1) and (11) below, to a penalty equal to 15 per cent, of the VAT which would have been lost if the inaccuracy had not been discovered.

(2)	The circumstances referred to in subsection (1) above are that the VAT for the period concerned which would have been lost if the inaccuracy had not been discovered equals or exceeds whichever is the lesser of £1,000,000 and 30 per cent of the relevant amount for that period.

(3)	Any reference in this section to the VAT for a prescribed accounting period which would have been lost if an inaccuracy had not been discovered is a reference to the amount of the understatement of liability or, as the case may be, overstatement of entitlement referred to in relation to that period, in subsection (1) above.

(4)	In this section “the relevant amount”, in relation to a prescribed accounting period, means – 

(a)	for the purposes of a case falling within subsection (1)(a) above, the gross amount of VAT for that period; and
(b)	for the purposes of a case falling within subsection (1)(b) above, the true amount of VAT for that period.

(5)	In this section “gross amount of tax”, in relation to a prescribed accounting period, means the aggregate of the following amounts, that is to say – 

(a)	the amount of credit for input tax which (subject to subsection (8) below) should have been stated on the return for that period, and
(b)	the amount of output tax which (subject to that subsection) should have been so stated.

(6)	In relation to any return which, in accordance with prescribed requirements, includes a single amount as the aggregate for the prescribed accounting period to which the return relates of – 

(a)	the amount representing credit for input tax, and
(b)	any other amounts representing refunds or repayments of VAT to which there is an entitlement,

references in this section to the amount of credit for input tax shall have effect (so far as they would not so have effect by virtue of subsection (9) below as references to the amount of that aggregate.

(7)	In this section “the true amount of VAT”, in relation to a prescribed accounting period, means the amount of VAT which was due from the person concerned for that period or, as the case may be, the amount of the VAT credit (if any) to which he was entitled for that period.

(8)	Where – 

(a)	a return for any prescribed accounting period overstates or understates to any extent a person’s liability to VAT or his entitlement to a VAT credit, and
(b)	that return is corrected, in such circumstances and in accordance with such conditions as may be prescribed, by a return for a later such period which understates or overstates, to the corresponding extent, that liability or entitlement,

it shall be assumed for the purposes of this section that the statements made by each of those returns (so far as they are not inaccurate in any other respect) are correct statements for the accounting period to which it relates.

(9)	This sections hall have effect in relation to a body which is registered and to which section 33 applies as if – 
(a)	any reference to a VAT credit included a reference to a refund under that section, and
(b)	any reference to credit for input tax included a reference to VAT chargeable on supplies, acquisitions or importations which were not for the purposes of any business carried on by the body.

(10)	Conduct falling within subsection (1) above shall not give rise to liability to a penalty under this section if – 

(a)	the person concerned satisfies the Commissioners or, on appeal, a tribunal that there is a reasonable excuse for the conduct, or
(b)	at a time when he had no reason to believe that enquiries were being made by the Commissioners into his affairs, so far as they relate to VAT, the person concerned furnished to the Commissioners full information with respect to the inaccuracy concerned.

(11)	Where, by reason of conduct falling within subsection (1) above – 

(a)	a person is convicted of an offence (whether under this Act or otherwise), or
(b)	a person is assessed to a penalty under section 60,

that conduct shall not also give rise to liability to a penalty under this section.

(3)	Section 83 VATA 1994 

(1)	Appeals – an appeal shall lie to a tribunal in respect of:-

(a)	…
(b)	the VAT chargeable on the supply of any goods or services on the acquisition of goods from another Member State or, subject to section 84(A) on the importation of goods from a place outside the Member States;
(c)	the amount of any input tax which may be credited to a payment;
(d)	any claim for a refund under any regulation made by virtue of section 13(5) …
(e)	proportion of input tax allowable under section 26 …

The Background and Findings of Fact

4.	The Appellant carries on business in the import, export and retail sale of Persian and oriental rugs and carpets from premises at Unit 6 Building D, OCC Estate, 105 Eade Road, London N4 1TJ.

5.	The Appellant incorporated with effect from 9 March 2006 under Company No. 05737821. The Appellant was registered for VAT with effect from 14 March 2006 under registration number 877 6179 63.  
6.	Four lots of carpets were released from the fiscal warehouse on 19 May 2006 on a payment of import duty and VAT in the sums of £8,039.60 VAT and £2,758.83 import duty and £30,250.69 VAT and £10,111.05 import duty, £82.05 VAT and £27.90 import duty and £214.04 VAT and £28.19 import duty (£38,586.38 VAT and £12,925.97 import duty).

7.	The Respondents received a VAT return completed by the Appellant for the period from 14 March 2006 to 31 August 2006 on 2 October 2006 declaring an amount as being due to the Appellant in the sum of £54,863.12.

8.	In a letter dated 19 October 2006 the Respondents requested that the Appellant provide the working papers in support of the declaration made and copies of the five largest purchase invoices.  A further letter was sent to the Appellant dated 2 January 2007 stating that unless the required information was provided within 14 days then the figures on the return would be amended to “Nil”.

9.	The Appellant provided a VAT summary and seven expense invoices to the Respondents and repayment of the amount claimed was authorised on 15 January 2007.  

10.	By letter dated 8 January 2008 the Respondents advised the Appellant that a visit would be made to the Appellant’s premises to examine the records and accounts of the business.  The visit took place on 19 February 2008 with Mr Shokri, Director of the Appellant and Mr Shah, accountant to the Appellant being present.  

11.	The Respondents’ officer found that the amount of import duty paid in the sum of £12,925.97 had been entered onto the Appellant’s VAT records as though it was an amount of VAT that could be reclaimed on the August 2006 VAT return.  

12.	The Respondents’ officer wrote to the Appellant on 20 February 2008 advising that an assessment in the sum of £12,925.97 would be issued in respect of treating that amount paid as import duty on the removal of carpets from a fiscal warehouse as VAT and other errors made by the Appellant were referred to in the letter.  

13.	The Appellant’s accountant contacted the Respondents’ officer by telephone on 12 March 2008 asking for further time to discuss the matters raised with his client and the message was confirmed in an email of 14 March 2008 with a request that the issue of any assessment be delayed.  The Respondents allowed 21 days for a response.

14.	By letter dated 29 May 2008 the Respondents advised the Appellant that an assessment in the sum of £12,925.97 would be issued that day as no response had been made to the earlier letter and Form VAT 655 Notice of Assessment was issued by the Respondents on 5 June 2008.

15.	By letter dated 16 June 2008 the Appellant was notified that it had incurred a penalty for misdeclaration under the provisions of section 63 of VATA 1994 in the sum of £1,938 for the 14 March 2006 to 31 August 2006 tax period.  The Respondents had not found that the Appellant had a reasonable excuse for its conduct and there were no grounds upon which to mitigate the penalty as notified.

16.	On 27 June 2008 an appeal was lodged against the penalty for misdeclaration or neglect, mitigation and assessment of tax signed by Mr Shokri as director.

17.	By letter date 27 August 2008 the Respondents invited the Appellant to submit any new information in relation to its appeal and in the absence of new information the Appellant was advised in a letter dated 10 September 2008 that following the review process the penalty imposed under section 63 of VATA 1994 had been mitigated by 50% to £969.  

18.	Mr Mahmood Shokri is the director of the Appellant whose business activities are the import and export of Persian and oriental rugs and carpets including retail sale.  

19.	Mr Shokri made telephone enquiries with Turn Team of HM Customs and Excise in Swansea and was given a Turn unique reference number for the Appellant on 28 June 2006 number 877617963000.

20.	Mr Shokri, director of the Appellant and Mr Shah, accountant to the Appellant were cooperative with the Respondents’ officer Mr Barnard on his visit to the Appellant’s premises on 19 February 2008.

21.	Mr Shokri in his evidence to the Tribunal confirmed that he now agreed with the Respondents that the amount of import duty paid in the sum of £12,925.97 had been entered on to the Appellant’s VAT records as though it was an amount of VAT that could be reclaimed on the 08/06 VAT return.  The said amount of import duty is not a charge to VAT within the meaning of section 18D of the VATA 1994 and is not input tax within the meaning of section 24 of the VATA 1994.  The amount claimed by the Appellant is not input tax within the provisions of section 25 and 26 of the VATA 1994. 

22.	An assessment was correctly issued in the sum of £12,925.97 which had been treated as an amount paid as import duty on the removal of carpets from the fiscal warehouse as VAT.  A sum of £12,955.97 is not an amount of VAT that can be reclaimed.  The notice of assessment in the sum of £12,925.00 for the period from 14 March 2006 to 31 August 2006 was correctly issued on 5 June 2008 under the provisions of section 73 of the VATA 1994.

23.	The Appellant was provided with HMRC Notices 700, the VAT Guide and Notices relating to cash accounting, annual accounting and the “flat rate scheme” on or after 15 August 2006 before the Appellant was required to render its period 08/06 VAT return.  The information contained in Notice 700 refers to other HMRC publications to advise and inform the Appellant. 

24.	By a letter dated 10 September 2008 the Respondents’ customer contact complaints service at Dorset House, London notified the Appellant that if the Appellant considered that it was not obliged to pay the Notice of Assessment in the sum of £12,925 for the period from 14 March 2006 to 31 August 2006 issued on 5 June 2008 on the basis that the VAT return completed by the Appellant for the period from 14 March 2006 to 31 August 2006 had been investigated and authorised for repayment that this would be a misdirection and that the Tribunal would not have a power to consider further.

The submissions of the parties

25.	The Appellant contends that:-

“(a)	we dispute the decision, Assessment and Penalty because we consulted the Customs at the time of import and before our first VAT return and carried the instructions.  Further in Jan. 07, before refund being  made a senior team of Customs (Special national Compliance pre-cred SIFT Team) examined our document including our G.S.P., and relevant papers and authorised refund.  How could officer of Custom one year later found us responsible for what we were guided to do at the time yet alone penalised us for it.”

(b)	Mr Shokri for the Appellant believes that the element of duty was refundable and he was short of money for his business.  The Appellant consider that it had been misguided and misdirected by the Respondents. 

(c)	the penalty was a heavy burden for a struggling business.

(d)	the Appellant had not concealed anything.

(e)	the Appellant had been cooperative with that visit by the Respondents.

(f)	the Appellant had raised enquiries with the shipping agent and with the Respondents’ helpline and to the Turn Team in Swansea.

(g)	Mr Shokri, director of the Appellant was an authorised signatory of the limited company and that could have been purchased from the stockholder and had been in the bonded warehouse for approximately three years during which time the Appellant obtained title.  Mr Shokri for the Appellant raised enquiries with the shipping agent and with the Respondents. The Appellant had bills and promotions to pay.  The Appellant had not registered for VAT at an earlier date as Mr Shokri had been ill.  There was some delay in response to letters from the Respondents as Mr Shokri had been absent attending a funeral.  

(h)	the Appellant now accepts the assessment in the sum of £12,925 for the period from 14 March 2006 to 31 August 2006 issued on 5 June 2008.

(i)	there is a reasonable excuse for its conduct and grounds upon which to mitigate the penalty.

26.	The Respondents contend that:-

(a)	the Appellant, through its Director Mr M Shokri, possessed a knowledge of VAT from a business which was registered for VAT until 1 September 2000 under registration 505 6011 89, which should have enabled the Appellant to determine which amounts charged to it were VAT and could be reclaimed on its periodic VAT returns.
(b)	Mr Shokri is recorded as being the owner of the carpets removed from Warehouse and imported by the Appellant and can reasonably be expected to know that there were charges of VAT and Import Duty on the removal of his goods from the Warehouse.
(c)	the Appellant was provided with HMRC Notices 700, the VAT Guide, and Notices relating to Case Accounting, Annual Accounting and the ‘Flat Rate Scheme’ on or after 15 August 2000 before the Appellant was required to render its period 08/06 VAT return.  The information contained in Notice 700 refers to other HMRC publications to advise and inform the Appellant and it should have acquainted itself with all the relevant provisions in relation to its business activities.
(d)	the Respondents’ officer examined documents submitted by the Appellant which did not identify the amount of £12,925.00 as being amounts of import duty.  The Respondents released the claim submitted by the Appellant in respect of tax period 14 March 2006 and 31 August 2006 on limited examination of some of the Appellant’s records which were later found to be insufficient.  The Appellant has not provided a form C79 or acceptable alternative evidence to demonstrate that it is entitled to the amount in dispute.
(e)	telephone calls to the Respondents are recorded and that there was one phone call on 15 August 2006 resulting in the issue of notices to the Appellant.
(f)	the £12,925 was not import tax and not recoverable by the Appellant and had been properly identified by Mr Barnard on behalf of the Respondents.
(g)	the burden of proof was upon the Appellant who had failed to demonstrate that the assessment was in error or improperly raised.
(h)	there was no jurisdiction to make a determination of misdirection.
(i)	the Appellant was properly registered for VAT and it was for the Appellant and Mr Shokri as a director of the Appellant business to decide the appropriate time for the removal of stock from the bonded warehouse and that the consignment documents are clear and that if the Appellant considered that they were not clear further advice should have been sought.
(j)	insufficient evidence to show that Mr Shokri was ill to an extent that would affect him seeking advice from appropriate sources.
(k)	VAT is a self-assessed tax and that it was up to the Appellant to ensure that the returns were correct and to raise any enquiries in writing.

Conclusions

27.	The Tribunal found that the Notice of Assessment in the sum of £12,925 for the period from 14 March 2006 to 31 August 2006 was correctly issued on 5 June 2008 under the provisions of section 73 of VATA 1994 and during the course of the Tribunal hearing Mr Shokri on behalf of the Appellant agreed that the Notice of Assessment was indeed correct and that he had made a mistake. 

28.	There was one witness, Mr Shokri, for the Appellant. There were no witnesses for the Respondents.  There was no application for an adjournment.  The Tribunal considered that there was sufficient evidence upon which to reach a decision.

29.	The Tribunal found that there was a failure to declare the correct amount of tax in a tax period 08/06 and considered whether there should be a penalty under the provisions of section 63 VATA 1994. 

30.	The Appellant through its director Mr Shokri did possess a knowledge of VAT from the business registered for VAT under registration 505 6011 89.  The Appellant was provided with HMRC Notices 700, the VAT Guide and notices relating to cash accounting, annual accounting and the “flat rate scheme” on or after 15 August 2006 before the Appellant was required to render its period 14 March 2006 to 31 August 2006 VAT return.  The information contained in Notice 700 refers to other HMRC publications to advise and inform the Appellant and it should have acquainted itself with all the relevant provisions in relation to its business activities.  

31.	Mr Shokri is recorded as being the owner of the carpets removed from the bonded warehouse and imported by the Appellant and can reasonably be expected to know that there were charges of VAT and import duty on the removal of the goods from the warehouse.  It is for the Appellant to decide the appropriate time to remove the stock from the bonded warehouse. 

32.	The Respondents’ officer examined documents submitted by the Appellant which did not identify the amount of £12,925 as being amounts of import duty.  The Respondents released the claim submitted by the Appellant in respect of tax period 08/06 on the limited examination of some of the Appellant’s records which were later found to be insufficient.  The Customs duty of £12,925.97 together with the VAT of £38,586.38 equals the VAT reclaimed as import VAT for the period 08/06 of £51,512.35.  The original claim was cleared on the basis of £38,586.38 of the total input tax of £54,863.12 and was import VAT.  Customs duty is not VAT.  The Appellant is liable to pay the interest on the assessment.

33.	There were some delays in the Appellant responding to written enquiries by the Respondents.  

34.	Although there was no documentary evidence relating to Mr Shokri’s illness it was accepted by the Tribunal that Mr Shokri had been ill and suffered from depression.  Mr Shokri was able to provide oral evidence to the Tribunal.

35.	The Tribunal accepted that the Appellant believed that he was entitled to the refund of VAT.  However, there was a failure to declare the correct amount of tax and the Appellant through its director Mr Shokri did possess a knowledge of VAT and had been provided with HMRC notices and guides and could have made further enquiries both by phone and in writing with the Respondents.  Although Mr Shokri was unwell Mr Shokri could have made further enquiries and written enquiries or authorised others to assist him and the Appellant business.  Having carefully considered all of the evidence it was decided that there should be a penalty for misdeclaration for the period 08/06 on the £12,925 liable to the penalty of £1,938.  The Tribunal found that the Appellant did not have a reasonable excuse for its conduct in misdeclaration.  The penalty of £1,938 is however to be reduced as a result of the Appellant’s cooperation with the visit by officer Barnard of the Respondents and contacting the Respondents to obtain copies of Public Notices.  The penalty is to be mitigated by 50% and the total penalty due is £969.

36.	The Tribunal carefully considered whether there had been a misdirection and considered the obiter comments of Sales J in Oxfam v HMRC [2009] EHWC 3078 and the public law principles and legitimate expectation. The Appellant did not identify the amount of £12,925 as being an amount of import duty in any documentation supplied to the Respondents.  The Respondents released the claim submitted by the Appellant in respect of tax period 14 March 2006 to 31 August 2006 on limited examination of some of the Appellant’s records which were later found to be insufficient.  In evidence the Appellant accepted that the Notice of Assessment in the sum of £12,925 for the period from 14 March 2006 to 31 August 2006 issued on 5 June 2008 under the provision of section 73 of VATA 1994 was correct.  It is the Appellant’s responsibility to be aware of liabilities and to make full and sufficient enquiries and any complaint by the Appellant related to the advice given to the Appellant is not a matter properly within the jurisdiction of the Tribunal.  There was no misdirection by the Respondents and therefore no legitimate expectation on the part of the Appellant.  It was decided that this was consistent with the obiter comments of Sales J in Oxfam v HMRC [2009] EHWC 3078.  It was decided that if the obiter comments of Sales J are correct and that the tribunal does have a judicial review function then this would still not be of assistance to the Appellant as it was decided that there was no misdirection by the Respondents that gave rise to legitimate expectation because the Respondents’ mistake was caused by the Appellant not giving full disclosure and information at the appropriate time and by failing to make further enquiries with the Respondents.

37.	It was accepted by the Appellant that the Notice of Assessment in the sum of £12,925 for the period from 14 March 2006 to 31 August 2006 was correctly issued and the Tribunal confirms the assessment.  The Tribunal decided that there was a failure to declare the correct amount of tax in the tax period 08/06 and that there should be a penalty in the sum of £1,938 and that this should be mitigated by 50% to the sum of £969 and the appeal is therefore dismissed.

MRS FIONAGH GREEN
TRIBUNAL JUDGE
RELEASE DATE: 1 July 2010