[2012] UKFTT 290 (TC)
TC01978
Appeal number:
TC/2011/09927
VALUE
ADDED TAX – Penalties – Schedule 24 FA2007 – inaccuracies in appellant’s
partial exemption calculations - whether inaccuracies as a result of careless
actions – held yes – whether special reduction appropriate – held no – whether
decision not to suspend the penalties was flawed – held yes – HMRC ordered
pursuant to paragraph 17(4)(a), Sch. 24, FA 2007 to suspend the penalties –
appeal allowed to that extent
FIRST-TIER TRIBUNAL
TAX CHAMBER
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SHELFSIDE
(HOLDINGS) LIMITED
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Appellant
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- and -
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THE
COMMISSIONERS FOR HER MAJESTY’S
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Respondents
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REVENUE &
CUSTOMS
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TRIBUNAL:
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JUDGE JOHN WALTERS QC
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IAN B ABRAMS
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Sitting in public at Bedford Square , London on 26 March 2012
Mr M George, financial
controller, for the Appellant
Ms E Carroll, for the
Respondents
© CROWN COPYRIGHT
2012
DECISION
1.
Shelfside (Holdings) Limited (“Shelfside”) appeals against penalty
assessments for the VAT periods 08/10 and 11/10 in the amounts of £3,615 and
£4,358 respectively. These penalties were imposed by the Commissioners
(“HMRC”) following the finding of inaccuracies in the VAT returns which
Shelfside rendered for these periods. The inaccuracies were discovered at (or
soon after) an assurance visit to Shelfside by Officer John Goodwin on 27
January 2011. Shelfside’s business includes running residential caravan parks
and the ownership of various commercial and residential properties.
2.
In relation to period 08/10, the penalty is £3,615.30, being 15% of the
‘potential lost revenue’ of £24,102. The penalty was imposed because in
Officer Goodwin’s opinion Shelfside had failed to take reasonable care in
relation to the VAT returns and the ‘potential lost revenue’ had been
discovered from information given to HMRC ‘with prompting’. HMRC stated that
the penalty percentage range in these circumstances is 15% minimum to 30%
maximum and that the quality of disclosure determines the rate applicable
within this range. In the circumstances of this case Officer Goodwin allowed a
disclosure reduction of 30% ‘for telling HMRC about it’, a disclosure reduction
of 40% ‘for helping HMRC understand it’ and a disclosure reduction of 30% ‘for
giving HMRC access to records’. These reductions total 100%, which is applied
to the difference between the maximum and minimum penalty rates (i.e. 100% of
15%), leading to a reduction from the maximum percentage penalty of 30% of 15%
to reach a net percentage of 15%, which is the percentage which was applied.
3.
In relation to the period 11/10, the penalty is £4,358.70, which is
arrived at in a similar way, being 15% of the ‘potential lost revenue’ of
£29,058.60.
4.
Shelfside submitted in its Notice of Appeal that the errors in question
were not careless, on the basis that the VAT on expenditure now disallowed as
input tax had been claimed in the past in returns which had been verified by
HMRC. Shelfside submitted in its Notice of Appeal: ‘We feel we have followed
the process that has been verified and feel that we have taken the care that is
necessary on what is a subjective decision process with regards to direct
attribution in partial exemption’.
5.
Shelfside submits alternatively that if the Tribunal finds that it had
failed to take reasonable care then either the penalty ought to be mitigated to
nil pursuant to paragraph 11, Schedule 24, Finance Act 2007 (“FA 2007”) –
reduction in special circumstances – ‘due to the facts stated above regarding
the complexities and subjectivity of partial exemption’, or the penalty ought to
be suspended (under paragraph 14, Schedule 24, FA 2007).
6.
The inaccuracies identified by Officer Goodwin in Shelfside’s VAT
returns for the 08/10 and 11/10 periods were incorrect postings of sales to
zero-rated outputs rather than exempt outputs, and incorrect postings of
purchases to taxable outputs rather than exempt or residual input tax. As
Shelfside is a partially exempt trader, this impacts on the calculation of
recoverable input tax, and the assessments made for the periods 08/10 and 11/10
address this matter.
7.
This appeal is not against the VAT assessments raised by Officer
Goodwin, but only against the penalties charged.
8.
There is relevant background, in that before Officer Goodwin’s visit on
27 January 2011, Officer Jenny Nash visited Shelfside on 26 October 2009. Her
visit report states that she ‘ran through T codes [the various posting codes
relevant to Shelfside’s partial exemption calculation] to establish the
build-up of the [partial exemption] calculation. Mr Shipley, Mr Hanif and Mr
Best [Shelfside personnel] had clear understanding of how the business was
operating, the way they viewed input tax liabilities on the VAT return, however
I identified items I considered to be incorrect’.
9.
The items queried concerned the attribution of VAT on purchases, but
they were relatively small in amount. There was a subsequent visit by Officer
Nash and her colleague Mrs Vogues on 27 January 2010. Penalties were imposed
for the VAT periods 08/09 and 11/09 of £266 and £424 respectively (on the same
basis as the penalties in issue in the appeal and allowing a 15% discount for
the quality of the disclosure), but HMRC agreed to suspend the penalties subject
to the condition that the T codes were to be operated in accordance with the
‘agreed listing’ in order to allocate the liabilities correctly for the
application of the partial exemption calculation. This condition was accepted
by Shelfside in a document received by HMRC on 27 May 2010.
10.
The ‘agreed listing’ appears to be a list of T codes included in Officer
Nash’s letter to Shelfside dated 2 February 2010, as follows:
‘T1
– this is for all items which are used to make both taxable (zero-rated or
standard-rated) and exempt supplies. In the attached schedule [the schedule of
adjustments made by Officer Nash], some of the purchases listed as assets have
been included in this T code as they relate to supplies made by the company as
a whole, such as telephones, and vehicles.
T2
– this is purely for purchases relating to taxable supplies.
T4
– this is for purchases relating to exempt supplies – anything to be VAT exempt
when it is sold, and includes any expenses incurred on a property for which
ownership has been taken in part exchange for the sale of a taxable item. This
also includes any purchase expenses incurred in acquiring or selling land,
unless it has an Option to Tax.
T6
– materials for purchases related to taxable sales including all work done to
the land which is directly related to the property to be located and sold as a
taxable supply, such as commercial building(s), or new domestic dwelling(s).
T11
– this is currently used for the purchase of assets, but as explained at the
time of the visit, it does not make the appropriate division regarding the VAT
liability. As understood from our discussions, the assets will now be split
one of the three ways and two new T codes will be set up and advised to us in
due course.’
11.
Mr George gave evidence for Shelfside and Ms Carroll chose not to
cross-examine him. The evidence given by Mr George was as follows.
12.
He told us that the inaccuracies identified by Officer Goodwin in
Shelfside’s VAT returns for the 08/10 and 11/10 periods (the incorrect postings
of sales to zero-rated outputs rather than exempt outputs, and incorrect
postings of purchases to taxable outputs rather than exempt or residual input
tax) were as follows:
VAT of £20,725 – relative to
the purchase and installation of a sewage treatment plant for a caravan park.
No extra charge is made to Shelfside’s customers for the use of the sewage
treatment plant, but a charge (attracting positive-rated VAT) is made for
clearing out the plant. We understand that the charge made compensates
Shelfside for the cost incurred (which also attracts positive-rated VAT) in
having the plant cleared out. This VAT was allocated to T2 as a purchase
relating to taxable supplies (the clearing out charge) but Shelfside accepts
that this was incorrect and that it should have been allocated to T4 (exempt
supplies).
VAT of £1,703 – relative to
solicitors’ fees concerning a dispute about drainage on a caravan park. This
VAT was allocated to T2 as a purchase relating to taxable supplies (of
caravans) but Shelfside accepts that this was incorrect and that it should have
been allocated to T4 (exempt supplies) as attributable to the pitch on which
the caravan in question stands.
The balance of VAT – of £30,732
– being VAT relative to the cost of connecting up gas and electricity to
caravans. Mr George told us that Shelfside made a charge (attracting
standard-rate VAT) to customers for the connection, which recouped the cost.
In these circumstances, the Tribunal could not see that there had been an
inaccuracy in respect of the treatment of the VAT as being attributable to a
standard-rated output – i.e. allocation to T2. Ms Carroll stated that she
could not agree that there had been no inaccuracy or potential lost revenue
(within paragraph 5 of Schedule 24, FA 2007) but offered no further submission
on the point.
13.
Ms Carroll did refer us to Officer Goodwin’s revised partial exemption calculations
for the VAT periods 08/10 and 11/10 and to the assessment for the period 08/10
which he raised, and the adjustment of the amount of VAT repayable for the
period 11/10 which he imposed. These reflect ‘potential lost revenue’ of
£24,102.33 and £29,058.89 respectively.
14.
Since the hearing the Tribunal has attempted to trace back from Officer
Goodwin’s calculations to the source documents (invoices rendered to
Shelfside). Unfortunately this was only possible for the period 08/10. We
were unable to find the relevant invoices for the period 11/10 with our papers.
15.
However the invoices for the period 08/10 were not consistent with the
information given by Mr George. An analysis of them showed that £18,461.75 VAT
in that period related to the purchase and installation of the sewage treatment
plant; £8.697 VAT in that period related to legal fees (including Counsel’s
fees and travelling expenses as well as solicitors’ fees) in connection with
the drainage dispute; only £138 VAT related to the connection of the LPG
supply; and a further £700 VAT related to planning advice in relation to an
enforcement notice, which would seem to be properly allocable to exempt
supplies. Further, Mr George did not produce any evidence which showed that
the errors made in the returns for the periods 08/10 and 11/10 related to
transactions of the same type where the same treatment had been claimed in the
past in VAT returns which had been verified by HMRC.
16.
In relation to the care exercised by Shelfside in making the VAT returns,
Mr George told us that although Shelfside retained the services of a VAT
consultant, no advice had been taken with regard to the allocation of the
disputed items in the partial exemption calculations used by Shelfside in the
preparation of their VAT returns.
17.
We do not accept Shelfside’s submissions that the preparation of correct
partial exemption calculations involves any element of ‘subjectivity’. The
calculations ought to be objectively correct as a matter of VAT law. We do
understand (and accept) that Shelfside finds the preparation of partial
exemption calculations a complex matter, but in such circumstances a reasonably
careful trader would take VAT advice on their preparation.
18.
It follows from the above that the Tribunal finds that Shelfside did not
exercise reasonable care in the preparation of the partial exemption
calculations for the VAT periods 08/10 and 11/10 and therefore the VAT returns
for those periods.
19.
Subject to any VAT attributable to the cost of connection of gas and
electricity to caravans, which we consider to be attributable to fully taxable
supplies on the basis that the cost is recharged via a taxable supply by
Shelfside, we also confirm Officer Goodwin’s calculations of ‘potential lost
revenue’ for the purposes of paragraph 5, Schedule 24, FA 2007.
20.
We also find that there are no special circumstances in this case which
would justify any reduction of the penalty under paragraph 11 of Schedule 24,
FA 2007. The obligation to make a partial exemption calculation is an ordinary
obligation of a partially exempt trader. Although the calculation may be
difficult to make and so the trader may require the advice of an expert, the
circumstances of the calculation being required are entirely ordinary – there
is nothing special about them.
21.
We are more sympathetic to Shelfside’s submission that the penalty ought
to be suspended.
22.
The power to suspend a penalty is granted to HMRC by paragraph 14,
Schedule 24, FA 2007. By paragraph 14(3), HMRC ‘may suspend all or part of a
penalty only if compliance with a condition of suspension would help P [a
person who has given HMRC a document containing a relevant inaccuracy] to avoid
becoming liable to further penalties under paragraph 1 for careless
inaccuracy’.
23.
By paragraph 14(4), a ‘condition of suspension may specify (a) action to
be taken, and (b) a period within which it must be taken’. On the expiry of
the period of suspension (which cannot exceed two years and which must be
specified in a suspension notice), if P satisfies HMRC that the conditions of
suspension have been complied with, then the suspended penalty is cancelled,
otherwise it becomes payable.
24.
By paragraph 15(3), a person may appeal against a decision of HMRC not
to suspend a penalty payable by the person. On such an appeal the Tribunal may
order HMRC to suspend the penalty, but only if it thinks that HMRC’s decision
not to suspend the penalty was flawed (when considered in the light of judicial
review principles) (paragraph 17(4) and (6)). HMRC’s power to suspend a
penalty is subject to the possibility of an order by the Tribunal under
paragraph 17 (paragraph 17(7)).
25.
It is for the Tribunal therefore to consider whether in this case HMRC’s
decision not to suspend the penalties for the periods 08/10 and 11/10 was
flawed in a judicial review sense, which we take to be so unreasonable that no
reasonable body of Commissioners acting properly within their powers could have
taken it.
26.
As to that, the Tribunal notes that, in principle, HMRC have regarded
careless inaccuracies in the matter of the making of partial exemption
calculations to be suitable to be addressed by the penalty-suspension
procedure. This is clear from the fact that HMRC offered (and Shelfside
accepted) a suspension of the penalties charged for the VAT periods 08/09 and
11/09. As we have stated above, these penalties were suspended on condition
that ‘T codes are to be operated in accordance with agreed listing in order to
allocate liabilities correctly for the application of the partial exemption
calculation’ and the ‘agreed listing’ was Officer Nash’s listing set out at
paragraph 10 above.
27.
Ms Carroll submitted that HMRC had concluded that suspension was not
applicable to the penalties charged for the VAT periods 08/10 and 11/10 because
the inaccuracies were of the same sort as those which featured in the returns
for the VAT periods 08/09 and 11/09. There was also a penalty imposed for the
VAT period 05/10 of £7,461 for a reason not connected with the partial
exemption calculation. This penalty was suspended for 6 months on the
following conditions: (1) that systems should be put in place to ensure that
tax point errors are not possible; (2) that Shelfside meets its payment,
notification and filing obligations to HMRC; and (3) that at the end of the
suspension period Shelfside should confirm in writing that the suspension
conditions have been met and, if required, allow HMRC access to information to
check this statement.
28.
The Tribunal also notices that Mrs Sarah Bates, Higher Officer in HMRC’s
Appeals and Review Unit, in her review letter dated 2 November 2011, in respect
of the penalties charged for the VAT periods 08/10 and 11/10, wrote, in relation
to suspension:
‘Mr
Goodwin did not consider that suspension was appropriate as despite previous
penalties being suspended further errors have been made.
In
particular a penalty for period 11/09 was suspended with the condition agreed
to being that T codes were to be operated in accordance with the agreed listing
in order to allocate the liabilities correctly for the application of the
partial exemption calculation.
Penalties
in periods 08/09 and 05/10 were also suspended albeit with different
conditions.
I
agree with Mr Goodwin’s decision to not suspend the penalties for periods 08/10
and 11/10. I have taken into account the issue of repeated behaviour when
coming to this conclusion – you have made errors in this area before and you
did not contact HMRC for further advice regarding the transactions that have
resulted in the underdeclaration and the subsequent penalties.’
29.
Neither Mrs Bates nor Officer Goodwin gave oral evidence at the hearing
of the appeal and so it was not possible for the Tribunal to obtain any
elaboration of the reasons for HMRC’s refusal to suspend the penalties in
issue.
30.
From the information we have it appears that these reasons were:
That the inaccuracies in the
returns for the VAT periods 08/10 and 11/10 were of the same sort as those
which featured in the returns for the VAT periods 08/09 and 11/09;
That despite previous
penalties being suspended further errors have been made; and
That Shelfside did not
contact HMRC for further advice regarding the transactions that have resulted
in the underdeclaration and the subsequent penalties.
31.
We bear in mind that all the inaccuracies which have featured in this
appeal have been for careless actions, as opposed to deliberate actions
(whether concealed or not) for which the suspension arrangements are not
available. HMRC have at no stage alleged dishonesty (as opposed to
carelessness) on the part of Shelfside.
32.
We further bear in mind that the evident purpose of the suspension
arrangements is to educate a trader who has acted carelessly giving rise to
inaccuracies in his/her/its VAT returns by giving help to such a trader to
avoid him/her/it becoming liable to further penalties for careless inaccuracy
(cf. paragraph 14(3), Schedule 24, FA 2007).
33.
We also bear in mind that the suspension arrangements envisage
conditions of suspension which will assist the trader in the education referred
to.
34.
Against these considerations the Tribunal considers that HMRC acted
unreasonably in not suspending the penalties for the VAT periods 08/10 and
11/10 in reliance on the facts (1) that Shelfside made inaccuracies in the
returns for those periods of the same sort (i.e. in the partial exemption calculation)
as those which featured in the returns for the VAT periods 08/09 and 11/09; (2)
that this was despite the penalties for the VAT periods 08/09 and 11/09 being
suspended – i.e. despite the suspension of those penalties and the conditions
of suspension; and (3) that Shelfside did not contact HMRC for further advice
regarding the relevant transactions in the VAT periods 08/10 and 11/10.
35.
Our reasons for this are, first, that the simple repetition of
inaccuracies of the same sort should not of itself be a reason for refusing
suspension if the inaccuracies are careless and not deliberate and they relate
to an area which the trader bona fide finds confusing and difficult to
deal with correctly. This seems to the Tribunal to highlight the need for the
education referred to in paragraph 32 above (rather than penalisation) and
therefore to make suspension more, rather than less, appropriate.
36.
Secondly, we consider that the fact that the penalties for the VAT
periods 08/09 and 11/09 were suspended was itself not a relevant consideration
in deciding whether to refuse suspension in relation to the VAT periods 08/10
and 11/10. We note that HMRC suspended a penalty for the VAT period 05/10
despite the previous suspensions. By this HMRC seem to us to have accepted
implicitly that repeated careless inaccuracy is not a reason in itself for
refusing a suspension on a later occasion.
37.
Thirdly, we consider that the relevance of the fact that inaccuracies
relating to the same area (partial exemption calculation) were repeated was the
failure of Shelfside to operate T codes in accordance with the agreed listing
in order to allocate the liabilities correctly for the application of the
partial exemption calculation. If this had been a failure to undertake a
specific action included as a condition of suspension we would have regarded it
as a valid reason for refusing a subsequent suspension in relation to a
careless inaccuracy of the same type.
38.
But we criticise the opacity of the condition to operate T codes in
accordance with the agreed listing in order to allocate the liabilities
correctly for the application of the partial exemption calculation. The agreed
listing (included in this Decision at paragraph 10 above) was not much more
than a paraphrase of the legal rules relating to the partial exemption
calculation. It seems to us that it did not and could not have offered any real
help to Shelfside in determining how, in any particular instance, those rules
should be complied with.
39.
Finally, we regard the fact that Shelfside did not contact HMRC for
further advice regarding the transactions that have resulted in the
underdeclaration and the subsequent penalties as a relevant consideration in
that this was an eminently sensible and appropriate course of action to provide
the education referred to in paragraph 32 above and should, as it seems to us,
have been a condition of suspension for the penalties imposed for the periods
08/09 and 11/09. It was not, however, and in our judgment it was unreasonable
of HMRC to rely on failure to contact them in this way as a reason for refusing
a suspension in relation to the periods 08/10 and 11/10 when this had not been
imposed as a condition of suspension in relation to the periods 08/09 and
11/09.
40.
For these reasons we have concluded that the decision not to suspend the
penalties charged for the periods 08/10 and 11/10 was flawed when considered in
the light of the principles applicable in proceedings for judicial review
(paragraph 17(6), Schedule 24, FA 2007) and we order HMRC (in terms of
paragraph 17(4), Schedule 24, FA 2007) to suspend the penalty. The appeal is
allowed to that extent.
41.
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.
JOHN WALTERS QC
TRIBUNAL JUDGE
RELEASE DATE: 13 April 2012
