[2010] UKFTT 583 (TC)

TC00833

Appeal number: TC/2010/04324

Appeal against a penalty imposed under Schedule 24 of the Finance Act 2007 for an error found in the Appellant’s VAT return which HMRC classed as careless under Schedule 24 paragraph 3(1)(a)

FIRST-TIER TRIBUNAL

TAX 

	THE ATHENAEUM CLUB	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	S.M.G.RADFORD (TRIBUNAL JUDGE)							J.STAFFORD		

Sitting in public at Holborn Bars, London EC1N 2NQ on 30 September 2010

Margaret Jones for the Appellant

Gloria Ormiloye for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	This is an appeal against a penalty in the amount of £4,243.00 imposed on the Appellant as a result of an inaccuracy in a VAT return.
2.	The penalty relates to the VAT period 08/09 for which the Appellant showed a claim for input tax of £57,836.64 on the return. HMRC reduced this amount to £29,549.13 and as a result of this adjustment the Appellant’s repayment was reduced to £6,459.09.
3.	The adjustment was made by HMRC following a discovery by HMRC that the Appellant had claimed on a bill for water by treating 3/23 of the amount billed as though it were VAT however there was no VAT on the invoice to reclaim.
4.	The penalty was 15% of £28,287 which was the amount reclaimed in error.
Background and Facts
5.	The Appellant is a private members’ club in Southend which has been registered for VAT since 1 August 2003 when it opened.
6.	A VAT inspection was carried out on the Appellant by HMRC officer Mrs Freeman in early 2009.
7.	In July 2009 the Appellant received a bill from London Southend Airport Company Limited (“LASCL”) showing that £216,870.97 was due in respect of the water supply to their commercial premises. It was however only a statement and not an invoice. LASCL are a VAT registered company.
8.	Some years back the Appellant had been informed by HMRC officer Graham Back that as a VAT registered company it was required to charge VAT on any invoice raised for services whether it be directly or indirectly supplied. At the time this related to insurance which is in fact normally zero-rated but as the Appellant purchased the insurance and then passed on the charge the officer informed the Appellant that the charge would be subject to VAT.
9.	Mrs Jones, general manager of the Appellant, contacted Mrs Freeman on receiving the statement from LSACL as she was unsure of its VAT status. Mrs Freeman was also unclear stating that it was a “grey area” but she agreed to investigate the point.
10.	In the meantime the Appellant was required to submit its VAT return and, relying on Mr Back’s advice together with a letter received from Anglian Water which stated “VAT legislation requires Anglian Water to charge standard rate VAT on water supply charges for business customers …..”, in the absence of an actual VAT invoice from LSACL, decided that 3/23 of the amount on the statement related to VAT charged by LASCL and reclaimed £28,287.
11.	The Appellant was of the opinion that the water supply was VATable as it had previously been charged VAT on invoices for water relating to other properties in their portfolio and saw no reason to treat this bill any differently. The Appellant had a letter from the water board stating that if it had been charged VAT previously then it was entitled to reclaim it.
12.	The Appellant produced a water services bill issued by Essex & Suffolk Water on 14 July 2009 to one of the other organisations in the group which charged VAT on the supply of water. The Appellant had always been under the impression that VAT was chargeable on water and sewerage supplies and this bill reinforced that view.
13.	VAT can only be recovered if shown as charged on an actual VAT invoice. However it appeared from Mrs Jones’s evidence that she had based her calculations on the statement received as the actual VAT invoice had not been received at that time and only came to hand when Mrs Freeman requested it in the course of her investigations. The actual VAT invoice did not show that any VAT had been charged. 
14.	 In a letter dated 16 October 2009 Mrs Freeman informed Mrs Jones that the Appellant’s VAT return for the period 08/09 had been amended as a result of input tax being incorrectly reclaimed in error against a zero-rated purchase invoice for water and sewerage. She stated further that as the return contained an inaccuracy the Appellant might have to pay a penalty under Schedule 24 of the Finance Act 2007 (“Schedule 24”).
15.	In a letter dated 16 November 2009 the Appellant was informed that the error had been classed as “careless” as the invoice clearly showed that no VAT had been charged. A “careless” error is subject to a penalty of between 15% and 30% and accordingly a penalty of 15% of the input tax erroneously claimed had been imposed. The letter stated that suspension of the penalty had been considered but as the error appeared to be a one-off HMRC were unable to put forward any relevant suspension conditions.
16.	The Appellant requested a review of the decision and the reviewing officer upheld Mrs Freeman’s decision on the basis that the invoice received from LASCL did not show that any VAT due to them. The reviewing officer was of the opinion that the Appellant ought to have contacted either LASCL to enquire as to the VAT liability of their supply or HMRC’s National Advice Helpline. She concluded that she also concurred with Mrs Freeman’s view that as the error appeared to be a one-off situation without the likelihood of it re-occurring it was not possible to put any relevant suspension conditions in place.
17.	The Legislation
18.	Schedule 24 of Finance Act 2007 provides a penalty regime for both direct and indirect taxes. Paragraphs 1 to 3 state:
1.   (1) A penalty is payable by a person (P) where—
(a) P gives HMRC a document of a kind listed in the Table below, and
(b) Conditions 1 and 2 are satisfied.
       (2) Condition 1 is that the document contains an inaccuracy which amounts to,
                   or leads to—
          (a) an understatement of P’s liability to tax,
          (b) a false or inflated statement of a loss by P, or
          (c) a false or inflated claim to repayment of tax.
                   (3) Condition 2 is that the inaccuracy was careless or deliberate (within the
                  meaning of paragraph 3).
                  (4) Where a document contains more than one inaccuracy, a penalty is payable
                   for each inaccuracy.

2.  (1) A penalty is payable by a person (P) where—
         (a) an assessment issued to P by HMRC understates P’s liability to tax,
and
         (b) P has failed to take reasonable steps to notify HMRC, within the
              period of 30 days beginning with the date of the assessment, that it is
              an under-assessment.
     (2) In deciding what steps (if any) were reasonable HMRC must consider—
          (a) whether P knew, or should have known, about the underassessment,
              and
          (b) what steps would have been reasonable to take to notify HMRC.
     (3) In sub-paragraph (1) “tax” means—
          (a) income tax,
          (b) capital gains tax,
          (c) corporation tax, and
          (d) VAT.

Degrees of culpability
3   (1) Inaccuracy in a document given by P to HMRC is—
          (a) “careless” if the inaccuracy is due to failure by P to take reasonable care
                         (b) “deliberate but not concealed” if the inaccuracy is deliberate but P
                 does not make arrangements to conceal it, and
                         (c) “deliberate and concealed” if the inaccuracy is deliberate and P
                makes arrangements to conceal it (for example, by submitting false
               evidence in support of an inaccurate figure).
    (2) An inaccuracy in a document given by P to HMRC, which was neither
    careless nor deliberate when the document was given, is to be treated as
   careless if P—
         (a) discovered the inaccuracy at some later time, and
         (b) did not take reasonable steps to inform HMRC.

A VAT return is a “document” listed in the Table referred to in Paragraph 1 (1) (a) of Schedule 24.

Appellant’s submissions

19.	Mrs Jones contended that at the time the return fell due to be submitted she had not had sight of a VAT invoice. Some years back the Appellant had been advised by the HMRC Graham Back that as a VAT registered company they were required to charge VAT on any invoice raised for services. Although his advice related to insurance they had assumed that this applied equally to water and sewerage and LASCL was such a VAT registered company.
20.	The letter received from Anglian Water and the bill from Essex & Suffolk Water had further confused the issue. However in an attempt to clarify the issue she had telephoned Mrs Freeman who had carried out the Appellant’s VAT inspection earlier that year asking for her advice. Mrs Freeman herself had stated that it was a “grey area” but that she would investigate the point. This she did but it was after the VAT return required submission.
21.	The Appellant had acted in good faith believing that it was complying with the instruction previously given by HMRC, any error was completely unintentional and it was unfair to be penalised for following what the Appellant believed was HMRC advice. The error had been made as a result of honest misinterpretation.
22.	Having carefully read the letters from both Mrs Freeman and the review officer it appeared to the Appellant that HMRC had decided that it was not possible to suspend the penalty by imposing suspension conditions and so the Appellant had appealed to the Tribunal for cancellation of the penalty.
HMRC’s Submissions
23.	HMRC submitted that it was for the Tribunal to decide whether the Appellant had taken reasonable care as required by Paragraph 3 (1)(a) of Schedule 24 in completing its 08/09 VAT return. HMRC submitted that the Appellant had been careless in claiming back input tax when the invoice showed that no VAT had been charged by LASCL. The legislation states that VAT is only recoverable if a VAT invoice states that it has been charged.
24.	HMRC had found and corrected an inaccuracy in the Appellant’s VAT return whereby an input tax claim for £28,287 had been improperly made. HMRC were of the view that the inaccuracy was due to carelessness on the part of the Appellant making it liable to a penalty of 15% to 30% of the potential lost revenue.
25.	The inaccuracy was discovered during checks made on the Appellant’s VAT return and HMRC consider this to be a prompted disclosure within Paragraph 9 (2)(b) of Schedule 24. An unprompted disclosure is one that is made at a time that the person making it has no reason to believe that HMRC had discovered or were about to discover it. HMRC therefore contended that the correct level of penalty had been imposed for a careless prompted disclosure of an error.
26.	HMRC contended that the Appellant could have had the penalty suspended by accepting suspension conditions as referred to Mrs Freeman’ letter of 16 November 2009 but as the Appellant had not done so contended that the penalty imposed by them was that which was required by the legislation.
Findings
27.	The Tribunal found Mrs Jones’s evidence to be truthful and sincere. We found that she had carefully checked as much as possible as to the VAT liability of the water and sewerage supply. Whilst she had not telephoned LASCL or the HMRC National Helpline she had phoned Mrs Freeman, who had carried out the Appellant’s VAT inspection, for advice. Mrs Freeman herself was not immediately able to help and stated that she would need to investigate the position as it was a grey area.
28.	Mrs Jones had been misled by the letters from Anglian Water and the bill from Essex & Suffolk Water. The advice supplied by Graham Back further confused the issue.
29.	We find that Mrs Jones did take reasonable care and was not careless. 
30.	We checked the suggestion by HMRC that it was open to the Appellant to have had the penalty suspended by accepting suspension conditions but found that although the letter from Mrs Freeman might be classed as ambiguous, the letter from Ms Kay, the reviewing officer was absolutely unambiguous stating “I also concur with Mrs Freeman’s view that as the error appeared to be a one-off situation without the likelihood of it re-occurring, therefore we cannot put any relevant suspension conditions in place.” We found it somewhat illogical that HMRC refused to suspend a penalty on the grounds that the Appellant was unlikely to do it again.
Decision
31.	The appeal is allowed and the penalty hereby cancelled. The Appellant was not careless and took reasonable care.
31. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

S.M.G.RADFORD

TRIBUNAL JUDGE

RELEASE DATE: 17 November 2010