[2010] UKFTT 305 (TC)

TC00592

Appeal number:TC/2010/00555

Procedure – appeal out of time – appellant’s adviser failed to make valid appeal – HMRC pursuing winding-up order – former directors authorised by liquidator to conduct appeal

FIRST-TIER TRIBUNAL

TAX

                               B FAIRALL LIMITED (in liquidation)              Appellant

                                                                      - and -

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                             REVENUE AND CUSTOMS (VAT)          Respondents

                        TRIBUNAL: JUDGE ROGER BERNER                                                                                                  

Sitting in public at 45 Bedford Square, London WC1 on 21 June 2010

Oliver Conolly, instructed by Vyman Solicitors Limited, for the Appellant

Jonathan Holl, HMRC, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.       This was an application by the Appellant for permission to appeal out of time against an assessment to VAT and interest, made on 25 January 2007, in the sum of £252,325.88 and penalties of £21,409 assessed by notice dated 14 February 2007.  The appeal was made on 17 December 2009.

2.       The Appellant company is in liquidation.  It went into liquidation on or around 15 August 2007.  The liquidator is Mr Rod Weston of Mazars LLP.  Mr Weston has, by letter dated 18 June 2009, authorised Mr Fidahussein Gulamali Asharia and Mr Mohsin Janmohammed, to conduct the appeal.  I had a witness statement from Mr Janmohammed, who gave oral evidence and who was cross-examined by Mr Holl for HMRC.

Background

3.       Between 2002 and 2005, VAT inspectors visited the Appellant for routine inspections on three occasions, at which time documents evidencing the export of goods by the Appellant, including bills of lading, export sales invoices, and all the books and records were inspected.  No queries were raised by HMRC on those occasions.

4.       The VAT assessment in question, made on 25 January 2007, was based on the proposition that the export sales of the Appellant in question to non-EU countries were “supported by fictitious export evidence”.  In a letter dated 15 January 2007, HMRC had explained that the amount of alleged under-declared VAT was more than £1 million, but that, in view of the fact that it had been decided not to pursue alleged evasion, the matter would be approached by way of assessment, and the assessments would therefore be limited to the previous three years.

5.       Mr Janmohammed explained that he had immediately faxed all the documentation received from HMRC to the Appellant’s accountant, Mr Doshi of KD Associates.  He telephoned Mr Doshi and instructed him to appeal the assessment.  Mr Doshi confirmed that he had received Mr Janmohammed’s fax and that he would appeal the assessment immediately.

6.       It appears that Mr Doshi did not, for whatever reason, make the appeal.  The next the Appellant knew of the matter was when it received a letter dated 8 March 2007 from the HMRC debt management office requesting payment of the amount assessed.  Mr Janmohammed sent this to Mr Doshi by fax and again followed up with a telephone call in the course of which Mr Doshi expressed surprise that such a letter had been received as the assessment had, he said, been appealed.

7.       Despite what he had told Mr Janmohammed, on 11 March 2007 Mr Doshi wrote to HMRC’s debt management office in Northampton, purporting at that stage to appeal the original assessment.  That letter states:

“This letter is a formal appeal against the assessments raised and we would appreciate if you would forward the appeal to the relevant office and inspector dealing with this case now.

We look forward to your immediate response and ask you to withhold any collection proceedings against the Company as the directors believe the assessments to be totally incorrect.”

8.       On 4 May 2007 HMRC wrote to the Appellant.  The letter informed the Appellant that if payment of the outstanding amount was not made within seven working days, the solicitors acting for HMRC would petition for the winding up of the Appellant company.  Again this was sent to Mr Doshi, who said that he could not understand the actions of HMRC, as an appeal had been made.

9.       Matters continued to escalate.  On 9 August 2007  Clarke Willmott, acting for HMRC, sent KD Associates a certificate of costs that had been filed with the Bristol County Court in respect of an application for a winding-up order.  Mr Doshi faxed Clarke Willmott on 13 August 2007 seeking a two-month adjournment.  This request was not accepted, and the Appellant went into liquidation on or around 15 August 2007.  The Official Receiver had responsibility for the Appellant company until the beginning of 2008, when Mr Weston of Mazars was appointed as liquidator.

10.    At this stage, Mr Janmohammed told me, he was unaware that no valid appeal had been made.  He thought, as he had been told by Mr Doshi, that there had been a valid appeal.

11.    Following a long period of negotiations with the liquidator, which commenced with a meeting in early 2008 between Mr Janmohammed and his solicitors Vyman Solicitors Limited, and Mazars and their solicitors, Macfarlanes, an agreement was reached that Mr Janmohammed and Mr Asharia, the two former directors and shareholders in the company, would take over the conduct of the appeal on behalf of the Appellant.  The letter dated 18 June 2009 recording this agreement refers to the “conduct” of an appeal, and requires the former directors to “diligently pursue the appeal”.  Tellingly, it does not make any reference to the making of an appeal.

12.    Mr Janmohammed explained to me that the company had purchased a commercial property in or around August 2005 for £940,000.  This was a warehouse from which the Appellant and an associated company (not in liquidation) carried on business.  A loan of £78,000 had to be repaid, and Mr Janmohammed and Mr Asharia had taken out second mortgages on their homes.  If the amount of VAT, interest and penalties were to be sold by the liquidators, the property would have to be sold, and the business could not continue.  This would have devastating financial consequences for the former directors.

13.    Following the June agreement, solicitors acting for the former directors instructed counsel to advise.  There were a number of requests for further documentation, which was supplied to counsel.  A conference with counsel was held on 16 November 2009, at which time further documents were requested, including documents that had to be obtained from KD Associates.  On 26 November 2009 counsel advised that the 11 March 2007 letter was not a valid appeal, and that an appeal had to be lodged as a matter of urgency.  Mr Janmohammed said that it was only on receipt of counsel’s advice that he realised that there had been no valid appeal; indeed, this was the first time that he himself had seen the letter of 11 March 2007.

14.    The appeal was lodged on 17 December 2007.  It is that appeal for which the Appellant now seeks permission to make out of time.

Discussion

15.    There has been a very considerable delay between the date of the assessment in question in this case, and the date of the penalty notice, and the making of the appeal.  However, I must consider the circumstances of that delay.  I am also mindful of the importance of the particular discretion I am asked to exercise here.  Effectively, if I give permission for the appeal to proceed, I will be conferring on the Tribunal a jurisdiction that it would not otherwise have.

16.    At the material time, the time limit for the making of an appeal was set out in rule 4 of the Value Added Tribunals Rules 1986.  Under that rule a notice of appeal was required, generally, to be served on the tribunal before the expiration of 30 days after the date of the document containing the disputed decision.

17.    Since 1 April 2009, the Tribunal is governed by the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (“the 2009 Rules”).  Under rule 20(4) the Tribunal must not normally admit a notice of appeal if it is made late, but can do so if it extends time for the notice of appeal under rule 5(3)(a).  Accordingly I am asked to extend the time for the Appellant’s notice of appeal.

18.    Mr Conolly, for the Appellant, referred me to rule 2 of the 2009 Rules, and to the overriding objective of those Rules.  As the tribunal of which I was a member said in the recent case of ERF Limited v Revenue and Customs Commissioners [2010] UKFTT 238 (TC), the correct approach in my view is to consider the exercise of my discretion in the context of the overriding objective of enabling the Tribunal to deal with cases fairly and justly.  This involves balancing the interests of the parties.

19.    I agree therefore with Mr Conolly that this is a balancing exercise.  All relevant factors must be taken into account.  In this connection Mr Holl raised a question on what meaning ought to be ascribed to “justice” in this context.  My answer is there would be injustice in a case where the balance of prejudice favoured allowing the appeal to proceed, not to allow it to do so, or if balance favoured not permitting it to proceed, then nevertheless in permitting it.  So it all comes down to the balancing of the interests of the parties.

20.    Mr Conolly referred me to several authorities, which concerned appeals in direct tax cases.  The facts of those cases were of course different from those of the instant case, but I do not agree with Mr Holl that they should not be followed, as being distinguishable on their facts.  They illustrate principles to be adopted, irrespective of their particular facts.

21.    In R (on the application of Browallia Cal Ltd) v General Commissioners of Income Tax [2004] STC 296, the High Court held that the discretion of the tribunal to allow a late appeal to proceed is a discretion at large, and it is not limited to the factors that have to be taken into account, in direct tax appeals, under section 49 of the Taxes Management Act 1970.  Mr Holl came close, in my view, to arguing that the discretion of the tribunal is similarly curtailed by reference to section 83E of the Value Added Tax Act 1986, and that the test should be whether there is a reasonable excuse, or how far the appellant had taken steps to progress the appeal.  I reject that submission for the same reasons as were given in Browallia.  The conduct of the Appellant is a factor, but it is only one of the factors that I must consider.

22.    I agree with Mr Conolly that, having regard to R (on the application of Cook) v General Commissioners of Income Tax and another [2007] STC 499, one of the factors to be taken into account is whether the appellant has a prima facie case.  This consideration goes no higher than that; I am not here making any decision on the merits of that case.

23.    I also agree, and here I concur with the tribunal in the recent decision in Marijus Leliunga v Revenue and Customs Commissioners [2010] UKFTT 229 (TC), that having regard to the correlation between the overriding objective as expressed in the 2009 Rules with that in Rule 1.1 of the Civil Procedure Rules (“CPR”), the factors set out in Rule 3.9(1) of the CPR are relevant to the exercise of my discretion.

24.    This includes, and I follow here R v Commissioners of Customs and Excise, ex parte British Sky Broadcasting [2000] EWHC Admin 370 and Sayers v Clarke Walker (a firm) [2002] 1 WLR 3095, whether the was a misapprehension on the part of an adviser.  I do not accept Mr Holl’s argument on the test as being one of reasonable excuse, and that the Appellant ought to have established the position for itself and not relied upon its advisers to the extent that it did.   Mr Holl argued that reliance on a third party was not a reasonable excuse.  However, this proposition is effectively derived from section 71 VATA, which applies only in relation to sections 59 to 70 of that Act, and can have no application in the case of an exercise of discretion to allow an appeal to proceed out of time.  Where, as in Sayers v Clarke Walker (see para [27]), the failure to comply was caused by a part’s legal representatives and not by the party itself, or, as in BSkyB (at p 9), the advisers had a misconception as to what the law required, those are factors that the tribunal ought to weigh in the balance.

25.    I turn therefore to the facts, and to the evidence of Mr Janmohammed, whom I find to have been a truthful and credible witness.

26.    On, or shortly after 25 January 2007, when the VAT assessment had first been received, Mr Janmohammed sent all the papers to Mr Doshi with instructions to appeal.  I find that it was reasonable for the Appellant to have relied on Mr Doshi in this respect.  Mr Doshi was a trusted adviser who had for many years dealt with the Appellant’s accounts and financial affairs.

27.    On 11 March 2007 Mr Doshi made an ill-fated attempt to make an appeal.  Mr Holl suggested in argument that this letter had not been received by HMRC, but I find on the balance of probability that it was sent.  The fact of the letter having been sent is consistent with the apparent belief (though misguided) of the accountant – as expressed in conversations with Mr Janmohammed – that an appeal had been made.  In any event, from documents helpfully produced by Mr Holl, it was recorded by HMRC that the assessment was disputed, so it is clear that HMRC were aware of this, and actions were taken, even though not entirely appropriate in the context of an appeal, such as the request for an adjournment; this too could have put HMRC on notice that the assessment was disputed.  This is not in my view a case of the nature of Marijus Leliunga, where the tribunal found that (at [24]) at the relevant times there had been no suggestion that the appellant in that case disagreed with the tax determined, in that instance by a closure notice and assessments to income tax.

28.    Following the liquidation of the Appellant company in August 2007, there was a delay until the beginning of 2008 before Mr Weston was appointed as liquidator.  It appears that nothing was done by the Official Receiver (who had responsibility up to the time of Mr Weston’s appointment).  At the meeting in early 2008 with Mazars the background to the assessment was discussed, but even then no-one appeared to consider that there had been no valid appeal.  A liquidator who was aware that no valid appeal had been made would in the ordinary course have, at the least, filed a protective appeal.  The fact that this was not done, allied to the way in which the eventual agreement for Mr Janmohammed and Mr Asharia to take over conduct of the appeal was expressed, without any reference to the making of an appeal, convinces me that it was not apparent to anyone outside HMRC that at that time there had been no valid appeal.

29.    It took time for Mazars to give authority to the former directors to conduct the appeal.  This was not done until 18 June 2009.  Mr Holl made the point that even then it took until December 2009 for the appeal to be made.  But nothing in the letter agreement suggested that an appeal needed to be made, and the Appellant’s misapprehension of the true position persisted until counsel’s advice was received.

30.    I turn therefore to the factors which Mr Connolly suggested, and which I accept, I must take into account.

(1)        Was the failure to comply with the time limit intentional on the part of the Appellant?  No.  The Appellant instructed Mr Doshi to appeal the assessment immediately it had been received, and was entitled to rely on him to have done so.

(2)        Was the Appellant under a reasonable but mistaken misapprehension that its accountant had appealed?  Yes, for all the reasons I have given.  This misapprehension continued until counsel’s advice was received on 26 November 2009.

(3)        Did the fault for the delay (if any) lie with the lay client or its professional advisers?  On the evidence before me, the fault was that of Mr Doshi, who was responsible both for delay and for a misconception as to the legal requirements for a valid appeal.

(4)        Does the appeal have strong prima facie merits?   Mr Conolly argued that there was very strong evidence that the Appellant’s appeal has merit.  He submitted that the Appellant’s appeal would succeed or fail depending on whether the Appellant satisfies the test laid down in Netto Supermarket GmbH & Co v Finanzamt Malchin [2008] STC 3280.  That case deals with the law relating to exports to non-EU countries, as here.  The principle in Netto in relation to exports is that it is possible to reclaim VAT on such exports if the exporter (i) acts in good faith, and (ii) takes every reasonable measure to satisfy himself that the goods were exported.  This is so even if the goods (unbeknownst to the taxpayer) are not as a matter of fact exported.  I do not propose to discuss in detail the merits of the Appellant’s case, and as Mr Conolly said, I was provided with only information at the prima facie level.  I am satisfied, however, that the Appellant has a prima facie case for this purpose.  I found Mr Janmohammed to be a credible witness, and there was evidence that the Appellant’s procedures had been reviewed prior to the assessment by HMRC and not found wanting.  The fact that the Appellant acquired valuable property in 2005 can be argued to be a factor in its good faith.  And there has been no allegation of fraud.

(5)        Will there be prejudice to HMRC if the appeal is heard?  Mr Conolly argued that there could be no conceivable prejudice to HMRC.  He submitted that the appeal would simply allow the Tribunal to determine whether the VAT assessment under appeal is correct or not.  I do not agree that there is no prejudice to HMRC.  There is some prejudice having regard, as Mr Holl argued, to the delay and the consequent difficulty there may be securing witness evidence and documents at this stage removed.  I accept that, but I think that weighs in the balance on both sides, and particularly affects the Appellant, on whom the burden of proof will lie.  There is also prejudice, as the Upper Tribunal in John Wilkins and others v Revenue and Customs Commissioners [2009] UKUT 175 (TCC) observed (at [45] and [46]), in that there is prejudice to the government (or other taxpayers) if its planning of its income or expenditure are disrupted in the case of large, unexpected claims, and there is interest in legal certainty.  This case does not involve the order of magnitude of claims that were in issue in the Wilkins case, and other cases dependent on it, but the principle holds true, even if the extent of the prejudice may be lesser.  So I conclude that there will be prejudice to HMRC to that extent, and that is a factor to weigh in the balance.

(6)        Will there be demonstrable injustice if the appeal is not heard?  In all the circumstances of this case, from the failure of the Appellant’s accountant to lodge a valid appeal, despite being clearly instructed by the Appellant to do so, leading to a continuing misapprehension as to the Appellant’s position as regards its appeal, and the factors leading me to conclude that the Appellant has a prima facie case that merits being heard, I conclude that it has been demonstrated that there would be injustice were I to refuse to allow this appeal to proceed.

Decision

31.    Taking all these factors into account, and weighing the interests of both the Appellant and HMRC, and the potential prejudice to each of them, I have reached the conclusion that the balance favours my granting permission to appeal out of time.  Accordingly, I grant the Appellant permission to appeal against the assessment made on 25 January 2007, in respect of VAT and interest, and the penalty for which notice was given on 14 February 2007.

Directions

32.    As a consequence of my decision, I direct:

(1)        that this appeal be allocated as a Standard case;

(2)        that HMRC deliver a statement of case to the Tribunal and to the Appellant within 60 days of the release of this decision; and

(3)        liberty to apply.

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.

ROGER BERNER

TRIBUNAL JUDGE

RELEASE DATE: 6 July 2010