18967
MISDECLARATION PENALTY – Assessment understated tax amount due from Appellant – Appellant paid assessment amount and neither notified Commissioners of understatement nor made return – Appellant had received return form but had not submitted it – Appellant claimed to have reasonable excuse based on statement on amended registration form – Whether reasonable excuse – No – Whether grounds for mitigation on grounds of confusion possibly caused by statement on amended registration form – Yes – Penalty reduced to 50% - VAT Act 1994 s.63(1)

LONDON TRIBUNAL CENTRE

	CITISTAR (UK) LTD	Appellant

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	STEPHEN OLIVER QC  (Chairman)
						CAROLINE de ALBUQUERQUE					 

Sitting in public in London on 23 February 2005

No appearance for the Appellant 

Jonathan Holl for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	This appeal was called on for hearing at 10.30am on 23 February 2005.  There was no one to represent Citistar (UK) Ltd.  The Tribunal had received a letter dated 21 February 2005 from VAT Consultants Ltd.  VAT Consultants Ltd had been notified of the hearing date but they stated in the letter that they were not instructed to represent Citistar at the hearing.  No other information was provided either in that letter or from Citistar indicating what Citistar’s intentions were.

2.	We decided to go ahead and hear the appeal in the absence of Citistar.  Rule 26 of the VAT Tribunals Rules enables us to do this.  It is important that Citistar should bear in mind that Rule 26(3) enables them, as the absent party, to apply in writing to the Tribunal to have the decision set aside on such terms as the Tribunal thinks fit.  It is also important to note that, if Citistar wishes to pursue this course, it must attend the hearing of the application to have this decision set aside.

3.	This is a misdeclaration penalty appeal and the penalty was issued pursuant to section 63 of VAT Act 1994.  Section 63(1)(b) states that where for any accounting period 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, that person has not taken all such steps as are reasonable to draw the understatement to the attention of the Commissioners, the person should be liable to a penalty equal to 15% of the VAT which would have been lost if the inaccuracy had not been discovered.  The effect of the provision is to give the taxpayer 30 days beginning from the date an assessment has been issued in which to inform the Commissioners if the assessment has understated its true liability, in order to avoid a penalty.  

4.	In the present case Citistar applied to be registered for VAT in September 2003.  Citistar specified 20 April 2003 as the date from which it wished to be registered.  Citistar was duly registered with effect from that date and the certificate was issued on 23 October 2003.  The certificate states at its head:

“Returns to be made in respect of the period ending 30 November 2003 and three monthly thereafter”.

On a date in mid November 2003 the Commissioners sent to Citistar their value added tax return for the period from 20 April 2003 to 30 November 2003.  The return was not submitted by the due date, i.e. the end of 2003.  

5.	On 10 December 2003 an amended Certificate of Registration was sent to Citistar.  This stated the effective date of registration as 20 April 2003.  It contain the following statement:

“Returns to be made in respect of period ending 29 February 2004 and three monthly thereafter”.

We will come back to this statement and its relevance to Citistar later in this decision.  

6.	In the absence of any return from Citistar by the due date, i.e. 31 December 2003, a Notice of Assessment was issued by the central computer on 16 January 2004.  This assessed the amount of tax payable by Citistar as £2,220 for the period 11/03.  The Notice of Assessment contains the following statement:

“If this tax assessment understates your liability and you do not draw this to the Commissioners’ attention within 30 days you may become liable to a Financial Penalty and Default Interest.  You are advised to render your return without delay.”

Citistar paid this assessment on or about 27 February 2004.  

7.	As the return for the 11/03 period had not been rendered by 18 March 2004 a Mr Zussman wrote to inform Citistar that he would be issuing an additional assessment based on information held by the Commissioners.   On 23 March 2004 an assessment for £96,092 of VAT plus £1,331.11 interest was issued to Citistar.  

8.	On 1 April 2004 the Commissioners received a VAT return for the 11/03 period.  The return declared net VAT payable to the Commissioners of £48,388.03, i.e. £46,168.03 more than the centrally issued assessment.

9.	The case for the Commissioners is that in those circumstances Citistar had received an assessment that understated its VAT liability for the 11/03 period and that within 30 days of the date of the assessment had taken no steps to draw the understatement to the attention of the Commissioners.  On that basis the actions of Citistar rendered them liable to a penalty.  The original penalty of £14,413 was reduced to 15% of £46,168.03, i.e. £6,925.  

10.	Section 70 of the VAT Act allows the Commissioners to mitigate penalty as they see fit.  The case put forward by Citistar in a letter dated 27 July 2004 stressed that Citistar had received three “Certificates of Registration” all alluding to different dates in regard to the first VAT return.  The letter states that it was Citistar’s belief that the certificate of 11 December 2003 amended the accounting period to a period ended 28 February 2004.  Accordingly, Citistar said, they had interpreted the certificate of 11 December 2003 as requiring that the first return should be submitted by the end of March 2004.  They did this.  They had paid the £2,200 assessed by the assessment issued on 16 January 2004, not because they wished to misrepresent their outstanding VAT liability, but because at the time they did not have adequate information to submit a correct return. 

11.	We have carefully considered whether Citistar has presented a reasonable excuse for the misdeclaration, i.e. the failure to notify the Commissioners that the assessment for £2,200 was too low.  That Citistar did not at the time have sufficient information on which to make a proper return does not provide it with a reasonable excuse.  The disparity between £2,200 and the amount actually returned for the period to 11/03, i.e. £48,388.03 is so great that Citistar could not have failed to have perceived that £2,200 was an inadequate payment of VAT.  

12.	Nor, in our view, did Citistar have a reasonable excuse based on the statement in the amended Certificate issued on 10 December 2003 that “Returns to be made in respect of period ending 29 February 2004 and three monthly thereafter”.  The message in the earlier Certificate of Registration was quite clear requiring a return to be made for the period ending 30 November 2003.  Citistar had duly been sent their VAT return for the period to 30 November 2003 which required it to make the return by the end of 2003 and notified it of the possible liability to a financial penalty if the return was not received by the due date.  Nothing sent to Citistar altered that requirement.

13.	For those reasons we do not think that Citistar has demonstrated a reasonable excuse for its failure to advise the Commissioners within 30 days of the assessment that it was too low.

14.	We turn now to mitigation.  The Commissioners have acknowledged that the issue of the amended Certificate of Registration may have caused some confusion and that a degree of mitigation should be allowed to recognize that fact.  On that basis they have mitigated the penalty by 20% to £5,540.  We accept that there are grounds for mitigation and that Citistar may have been confused by the statement in the amended Certificate of Registration.  They had every opportunity, however, to check with the Customs as to whether they were no longer required to render a return for the 03/11 period.  Moreover the Notice of Assessment in terms referred to the 11/03 period. At the same time we recognize that this was the first occasion on which Citistar had been required to make returns and pay VAT.  As a newcomer to the VAT regime, the message at the top of the amended Certificate of Registration could possibly have caused it confusion and engendered a sense of false security, i.e. that nothing needed to be done until March 2004.  Taking those factors into account, we consider that the penalty should be mitigated to 50% of the tax amount.  We leave the calculation of the amount and the adjustment of interest to the Commissioners and Citistar.  We allow the appeal in part.

STEPHEN OLIVER QC
CHAIRMAN

RELEASED: 8 March 2005

LON/04/858