Neutral Citation: [2023] UKFTT 726 (TC)
Case Number: TC08915
FIRST-TIER TRIBUNAL
TAX CHAMBER
By remote video hearing
Appeal reference: TC/2022/12767
VAT - penalty for failure to notify liability to be registered for VAT - non deliberate - whether to permit a new ground of appeal - no - whether special circumstances - no - whether reasonable excuse - no - appeal dismissed
Heard on: 22 May 2023
Judgment date: 21 August 2023
Before
TRIBUNAL JUDGE RACHEL GAUKE
JOHN WOODMAN
Between
GB-GADGETS LTD
Appellant
and
THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMS
Respondents
Representation:
For the Appellant: Zubair Hussain, director of the Appellant
For the Respondents: Olivia Donovan, litigator of HM Revenue and Customs’ Solicitor’s Office
DECISION
Introduction
3. A summary of this decision was released to the parties on 21 June 2023. GB-Gadgets subsequently applied for this full decision.
The form of the hearing
5. Prior notice of the hearing had been published on the gov.uk website, with information about how representatives of the media or members of the public could apply to join the hearing remotely to observe the proceedings. As such, the hearing was held in public.
Findings of fact
9. We make the following findings of fact.
15. On 17 December 2021, HMRC issued a VAT assessment for £208,173 for the period from 1 September 2013 to 31 March 2018. The assessment was calculated on the basis of sales records supplied to HMRC, including from eBay. The fact that the assessment was calculated on the basis of sales records was disputed by Mr Hussain; we set out at paragraph [47] below the evidence on which we make this finding of fact.
16. On 21 December 2021, HMRC sent GB-Gadgets a “penalty explanation letter”, setting out the penalties they intended to charge. This included the failure to notify penalty that is the subject of this appeal. HMRC sent GB-Gadgets a formal assessment notice in relation to this penalty on 23 February 2022. This stated that the penalty under FA 2008, Sch 41 was assessed in respect of the period 01/09/2013 to 31/03/2018.
21. A helpful recent summary of the principles which this Tribunal should apply when considering an application to amend grounds of appeal was provided by Judge Vos in C4C Investments Ltd [2022] UKFTT 367 (TC):
“[16] Mr Millington, on behalf of HMRC, referred to the decision of the High Court in Essex County Council v UBB Waste (Essex) Limited [2019] EWHC 819 (TCC). Peperall J helpfully reviewed at [8-11] the principles relating to applications to amend pleadings set out in Quah Su-Ling v Goldman Sachs International [2015] EWHC 759 and CIP Properties (AIPT) Limited v Galliford Try Infrastructure Limited [2015] EWHC 1345 (TCC) as well as adding his own comments. To the extent relevant to this application, the principles the Tribunal should apply can be summarised as follows:
(1) Whether to allow an amendment is a matter for the discretion of the Tribunal which must be exercised in accordance with the overriding objective of dealing with cases fairly and justly. This involves striking a balance between injustice to the applicant if the amendment is refused and injustice to the opposing party and other litigants in general if the amendment is permitted (Quah at [38(a)]). Dealing with appeals at a proportionate cost and avoiding delay where this is compatible with a proper consideration of the issues are part of the overriding objective in rule 2 of the Tribunal Rules.
(2) An application to amend is late if it could have been made earlier and the reasons for any delay are a relevant factor (CIP Properties at [19(a)] and Essex CC at [10]).
(3) An application to amend will normally be refused if the proposed amendment has no reasonable prospect of success (applying the test for summary judgment or striking out) (Quah at [36] and Essex CC at [11.1]).
(4) The consequences of allowing the amendment (for example in terms of further evidence and additional work for the parties) also needs to be taken into account. This will however be more relevant, the later the application is made during the course of the proceedings (Essex CC at [11.3]).”
22. We consider that this summarises the principles that we should apply when considering whether to permit a new ground of appeal in this case.
26. We are conscious that in refusing this application, we are denying GB-Gadgets the opportunity to review the evidence on which HMRC calculated the VAT assessment, and to challenge it. Against this, however, we have weighed the question of whether the proposed amendment would have a reasonable prospect of success.
27. Mr Hussain acquired the shares in GB-Gadgets in December 2017 and became a director in January 2018. Therefore, most of the period to which the penalty relates (1 September 2013 to 31 March 2018) was before the time of his involvement with the management of the company. He told us that his conclusion that GB-Gadgets did not exceed the VAT registration threshold until April 2018 was based on statements for the bank account that GB-Gadgets opened in September 2016, and that he did not have any records that were older than that.
30. Based on Mr Hussain’s submissions and oral evidence, therefore, we have concluded that the proposed new ground of appeal would have no reasonable prospect of success. As a result, there is no real injustice to GB-Gadgets in refusing permission to add the new ground.
The law on penalties for failure to notify
32. FA 2008, Sch 41 provides for penalties to apply to a failure to notify various liabilities under tax legislation, including a failure to notify liability to be registered for VAT.
33. The amount of the penalty, and various other provisions of FA 2008, Sch 41, depend on whether the failure “involves a domestic matter”. This is defined as a failure that results in a potential loss of revenue and does not involve either an offshore matter or an offshore transfer. The legislation also defines “offshore matter” and “offshore transfer”. The penalties are, broadly speaking, higher for a failure that involves an offshore matter or an offshore transfer, than for one that involves a domestic matter. In this case, HMRC have not argued that the failure involves an offshore matter or an offshore transfer. For simplicity, therefore, the following summary covers only the provisions of FA 2008, Sch 41 which relate to failures that involve a domestic matter, as these are the provisions that are relevant to this appeal. Other provisions are also summarised only to the extent that they are relevant for present purposes.
34. FA 2008, Sch 41, para 5 is concerned with degrees of culpability, including the meanings of deliberate and concealed, and deliberate but not concealed. FA 2008, Sch 41, para 6 is about the amount of the penalty, which is:
(a) for a deliberate and concealed failure, 100% of the potential lost revenue,
(b) for a deliberate but not concealed failure, 70% of the potential lost revenue, and
(c) for any other case, 30% of the potential lost revenue.
35. FA 2008, Sch 41, para 7 defines “potential lost revenue”. In the case of a failure to notify a liability to be registered for VAT, the potential lost revenue is the amount of VAT for which P (the person liable to the penalty) is, or but for any exemption from registration would be, liable for the relevant period. The relevant period is defined as the period beginning on the date with effect from which P was required to be registered, and ending on the date on which HMRC received notification of, or otherwise became fully aware of, P’s liability to be registered.
36. FA 2008, Sch 41, paras 12 and 13 provide for penalties to be reduced where P discloses a relevant failure. Para 12(2) provides that P discloses a failure by telling HMRC about it (“telling”), giving HMRC reasonable help to quantify the unpaid tax (“helping”), and allowing HMRC access to records to check the amount of unpaid tax (“giving”). Para 12(3) distinguishes between unprompted and prompted disclosures, providing that a disclosure is unprompted if it is made at a time when the person making it has no reason to believe that HMRC have discovered or are about to discover the failure. Para 12(4) provides that in relation to disclosure, “quality” includes timing, nature and extent.
37. FA 2008, Sch 41, para 13 provides that if a person who would otherwise be liable to a penalty has made a disclosure, HMRC must reduce the penalty to reflect the quality of the disclosure. Para 13(2) provides that the penalty may not be reduced below a specified minimum. In the case of a 30% penalty for a non-deliberate failure, if HMRC become aware of the failure less than 12 months after the time when the tax first became unpaid by reason of the failure, the specified minimum is 10% for prompted disclosure and 0% for unprompted disclosure. If HMRC become aware of the failure 12 months or more after the time when the tax first became unpaid by reason of the failure, the specified minimum is increased to 20% for prompted disclosure and 10% for unprompted disclosure.
38. FA 2008, Sch 41, para 14 provides that HMRC can reduce a penalty if they think it right because of special circumstances. Under para 14(2), “special circumstances” does not include ability to pay, or the fact that a potential loss of revenue from one taxpayer is balanced by a potential over-payment by another.
39. Under FA 2008, Sch 41, para 16, where a person is liable to a penalty, HMRC must assess the penalty, notify the person, and state in the notice the period in respect of which the penalty is assessed. The assessment must be made before the end of the period of 12 months beginning with the end of the appeal period for the assessment of tax unpaid by reason of the failure in respect of which the penalty is imposed.
40. FA 2008, Sch 41, paras 17 to 19 deal with rights of appeal, and the Tribunal’s powers. The Tribunal may on an appeal against the amount of a penalty affirm HMRC's decision or substitute for HMRC's decision another decision that HMRC had power to make. In substituting its own decision, the Tribunal may rely on special circumstances, but only if the Tribunal thinks that HMRC's decision on the application of special circumstances was flawed. Para 19(4) defines “flawed” as flawed when considered in the light of the principles applicable in proceedings for judicial review.
41. A decision is flawed in this sense if HMRC took into account irrelevant factors, failed to take into account relevant factors, or reached an unreasonable decision. A decision is also flawed in this sense if HMRC failed to think about the matter at all.
42. FA 2008, Sch 41, para 20 provides that liability to a penalty in the case of a non-deliberate failure does not arise if there is a reasonable excuse for the failure. Para 20(2) sets out circumstances, such as insufficiency of funds not attributable to events outside P’s control, which cannot constitute a reasonable excuse.
Whether the penalty was due
43. GB-Gadgets has appealed on the grounds that there were special circumstances. However, the initial burden is on HMRC to establish that events have occurred as a result of which the penalty was due. Evidence of these events must be provided to prove the relevant facts on the balance of probabilities.
47. HMRC provided us with relatively little evidence of the basis on which they had concluded that GB-Gadgets should have been registered for VAT from 1 September 2013, or the way in which they calculated the PLR. HMRC’s penalty explanation letter dated 21 December 2021 states: “The sales records provided show that you breached the VAT threshold in July 2013 and were liable to register for VAT on 1 September 2013”. HMRC’s review conclusion letter dated 9 June 2022 states: “The assessment for the pre-registration period 1 September 2013 to 31 March 2018 was raised on the basis that, according to e-bay sales, the VAT registration threshold was exceeded in July 2013, meaning you should have registered with effect from 1 September 2013.” It states further that the failure to register “is shown by the evidence of the e-bay and Amazon sales that occurred after incorporation and before VAT registration”.
48. While this evidence is relatively limited, GB-Gadgets did not supply evidence that would suggest that the statements in these letters were wrong, or that HMRC had calculated the PLR in any way other than by basing it on actual sales records provided by third parties.
52. As to the transcription error, the combined effect of FA 2008, Sch 41, para 16(3) and section 114 of the Taxes Management Act 1970 is that an error of this nature does not invalidate the penalty assessment.
53. We were satisfied on the basis of the documentary evidence that the penalty was assessed within the time limit provided in FA 2008, Sch 41, para 16(4), and was correctly notified as required by FA 2008, Sch 41, para 16(1). Mr Hussain did not dispute that GB-Gadgets had received the notice of the penalty assessment.
54. We are therefore satisfied that GB-Gadgets was (subject to any special circumstances or reasonable excuse) liable to a penalty for failing to notify HMRC of its liability to be registered for VAT with effect from 1 September 2013.
Special circumstances
62. We are only entitled to interfere with HMRC's decision in respect of special circumstances if that decision was “flawed”, when considered in light of the principles applicable in proceedings for judicial review.
63. Barry Edwards v HMRC [2019] UKUT 131 (TCC) was a case concerning late filing penalties under Schedule 55 of the Finance Act 2009 (“FA 2009”). FA 2009, Sch 55, para 16 contains provisions on special circumstances that are nearly identical to the provisions that apply in this case, in FA 2008, Sch 41, para 14 (see the summary at paragraph [38] above). In Barry Edwards, the Upper Tribunal cited and agreed with the statement made by Judge Vos in Advanced Scaffolding (Bristol) Limited v HMRC [2018] UK FTT 744 (TC):
“[101] I appreciate that care must be taken in deriving principles based on cases dealing with different legislation. However I can see nothing in schedule 55 which evidences any intention that the phrase “special circumstances” should be given a narrow meaning.
[102] It is clear that, in enacting paragraph 16 of Schedule 55, Parliament intended to give HMRC and, if HMRC's decision is flawed, the Tribunal a wide discretion to reduce a penalty where there are circumstances which, in their view, make it right to do so. The only restriction is that the circumstances must be “special”. Whether this is interpreted as being out of the ordinary, uncommon, exceptional, abnormal, unusual, peculiar or distinctive does not really take the debate any further. What matters is whether HMRC (or, where appropriate the Tribunal) consider that the circumstances are sufficiently special that it is right to reduce the amount of the penalty.”
64. The task of this Tribunal is, therefore, to assess the particular facts of this case and to determine, in our discretion but subject to the two exclusions in para 14(2), whether special circumstances justify reduction in the amount of the penalty.
67. We explained to Mr Hussain that the penalty was not imposed on him personally, but on the company, GB-Gadgets, which for legal purposes is a separate entity. The fact that the company underwent a change of ownership at the end of 2017 did not remove its liability to the penalty. Mr Hussain told us that he had cooperated with HMRC, and we accept that most of the period to which the penalty relates pre-dates his time as GB-Gadgets’ owner and director.
70. We accept that these facts are true, but they do not have a bearing on GB-Gadgets’ failure to notify its liability to be registered for VAT from 1 September 2013 to 31 March 2018. Mr Hussain was not involved in the management of GB-Gadgets in 2016, so his personal circumstances at that time are not relevant. Any events that took place, or circumstances that applied, from 2019 to 2021 are outside the relevant time period. In our view none of these are relevant factors for this purpose.
73. We are therefore unable to conclude that there were any relevant factors that should have been taken into account by HMRC when determining whether there were special circumstances for the purposes of the penalty legislation.
74. HMRC’s penalty explanation letter, dated 21 December 2021, states: “Based on the information we have, we don’t consider there are any special circumstances which would lead us to further reduce the penalty.” HMRC’s review conclusion letter, dated 9 June 2022, states: “I have considered the reasons you have provided for both the failure to notify and the inaccuracies, and do not consider you have demonstrated that special circumstances apply.”
75. We are satisfied that this evidence demonstrates that HMRC did think about whether there were any special circumstances that would apply in this case, and we do not consider that they reached an unreasonable decision. We also have no evidence to suggest that they took into account irrelevant factors.
Reasonable excuse
77. We also considered whether any of the factors alleged by GB-Gadgets to be special circumstances might, instead, amount to a reasonable excuse for the purposes of FA 2008, Sch 41, para 20.
“(1) First, establish what facts the taxpayer asserts give rise to a reasonable excuse (this may include the belief, acts or omissions of the taxpayer or any other person, the taxpayer's own experience or relevant attributes, the situation of the taxpayer at any relevant time and any other relevant external facts).
(2) Second, decide which of those facts are proven.
(3) Third, decide whether, viewed objectively, those proven facts do indeed amount to an objectively reasonable excuse for the default and the time when that objectively reasonable excuse ceased. In doing so, it should take into account the experience and other relevant attributes of the taxpayer and the situation in which the taxpayer found himself at the relevant time or times. It might assist the FTT, in this context, to ask itself the question “Was what the taxpayer did (or omitted to do or believed) objectively reasonable for this taxpayer in those circumstances?”
(4) Fourth, having decided when any reasonable excuse ceased, decide whether the taxpayer remedied the failure without unreasonable delay after that time (unless, exceptionally, the failure was remedied before the reasonable excuse ceased). In doing so, the FTT should again decide the matter objectively, but taking into account the experience and other relevant attributes of the taxpayer and the situation in which the taxpayer found himself at the relevant time or times.”
79. We considered whether any of the following could amount to a reasonable excuse:
(1) The fact that Mr Hussain only became the owner and director of GB-Gadgets from December 2017, and so was not personally involved in the company’s failure to register for VAT before that time.
(2) The birth of his children in 2016 and 2021, and his wife’s mental health problems diagnosed in December 2021.
(3) The harmful effect of the coronavirus pandemic on GB-Gadgets’ business.
80. We accept that these facts are proven, but are unable to accept that they amount to an objectively reasonable excuse for a failure to register for VAT that began in September 2013 and lasted until April 2018. In applying the quote from Perrin above, the taxpayer in question is GB-Gadgets, not Mr Hussain, and his lack of involvement with the company is not a reasonable excuse for the company’s failure to register. Events in 2021, and the coronavirus pandemic, all post-date April 2018 (the time when the failure ceased) and so cannot form a reasonable excuse for that failure. The birth of Mr Hussain’s child in 2016 was an event in his personal life at a time when he was not involved in the management of GB-Gadgets, so is not a reasonable excuse for a failure by the company at that time.
81. We are therefore unable to conclude that GB-Gadgets had a reasonable excuse for its failure to notify its liability to be registered for VAT between 1 September 2013 and 31 March 2018.
Disposition
82. For the reasons set out above, the penalty is confirmed and the appeal dismissed.
Right to apply for permission to appeal
83. 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.
RACHEL GAUKE
TRIBUNAL JUDGE
Release date: 21st AUGUST 2023