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Cite as: [2008] UKVAT V20546

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Cater Clark Ltd v Revenue & Customs [2008] UKVAT V20546 (25 January 2008)

20546

VAT – Misdeclaration penalty – Section 63 VATA : supplies between associated companies not in a VAT group – Failure to account for VAT on intra group supply – Regulation 94B not applicable – Whether any failure at all or reasonable excuse for inaccuracy – Appeal allowed

LONDON TRIBUNAL CENTRE

CATER CLARK LTD Appellant

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: CHARLES HELLIER (Chairman)

GEORGE MILES

Sitting in public in Bristol on 22 November 2007

Dave Memery, VAT Consultant, for the Appellant

Pauline Crinnion instructed by the Solicitor to HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

This appeal started as an appeal against a penalty assessed by the Commissioners under section 64 VAT Act 1994. However it was clear to us that the conditions for the imposition of a repeated misdeclaration penalty in section 64 had not been met. We therefore indicated that we would allow that appeal.

However it appeared that the circumstances were such that the conditions for a misdeclaration penalty under section 63 could potentially be fulfilled, and that it was likely that forthwith on our allowing the section 64 appeal the Commissioners would assess under section 63 by reference to the same facts. Mrs Crinnion confirmed that that would be the case.

But the facts relevant to the section 63 penalty were (apart from the condition in section 64(2) whose failure caused us to allow the appeal against the section 64 penalty) the same in relation to the assessment of and any appeal against such a penalty.

Given that the Appellant and the Respondent had turned up ready to address those issues we suggested that the parties might agree to deal with the section 63 penalty at the hearing. We adjourned for Mrs Crinnion to arrange by manuscript amendment an assessment under section 63 and offered the Appellant the opportunity of amending its notice of appeal so that it was against that penalty.

After a few hiccoughs caused by the need for haste imposed by the Tribunal, Mrs Crinnion served a notice of penalty assessment upon the Appellant's representatives. The Appellant's representatives amended their appeal, and we proceeded to hear the appeal against the section 63 penalty.

The Appeal against the section 63 penalty

On 22 November 2007 the Commissioners assessed the Appellant to the following misdeclaration penalties under section 63 VAT Act:-

Percentage Total penalty Reduced

Period Tax liable to penalty Mitigation amount Amount

06/04 £10,972.00 80% £1,645.00 £329.00

06/05 £11,445.00 80% £1,716.00 £343.00

06/06 £14,962.00 80% £2,244.00 £448.00

On 22 November 2007 the Appellant appealed against this assessment.

The Statutory Provisions

Section 63 provides that where for a VAT period,

"a return is made which understates a person's liability to VAT or overstates his entitlement to a VAT credit."

and the circumstances are such that "the VAT for the period concerned which would have been lost if the inaccuracy had not been discovered exceeds whichever is the lesser of £1,000,000 and 30 per cent" of the gross amount of VAT" for the period, then the taxpayer shall be liable to a penalty of 15% of the VAT which would have been lost if the inaccuracy had not been discovered.

The "gross amount of the VAT" is by section 63(6), the sum of the output and the input tax which should have been stated on the return.

The section provides relief from the penalty where the return is corrected, and also by section 63(10) if the taxpayer satisfies a tribunal that there was a reasonable excuse for the conduct which gave rise to the misdeclaration or where at a time when the taxpayer had no reason to believe that enquiries were being made he disclosed the inaccuracy. For the purpose of determining whether or not there is a reasonable excuse section 71(1)(b) provides that where reliance is placed upon another person to perform a task, neither that reliance nor any inaccuracy or dilatoriness on the part of the person relied upon is a reasonable excuse.

Section 70 provides that a penalty under section 63 (and 64) may be subject to mitigation. It provides that the Commissioners, or an appeal tribunal, "may reduce the penalty to such amount (including nil) as [the tribunal] think proper." But in exercising their powers of mitigation, the tribunal (and the Commissioners) are, by section 70(3), not permitted to take into account any of the following matters:-

(a) an insufficiency of funds available to pay the VAT or the penalty;

(b) "the fact that there has, in the case in question, or that case taken with other cases, been no or no significant loss of VAT;

(c) the fact that the person liable to the penalty or a person acting on his behalf has acted in good faith."

Thus if there is a reasonable excuse for the misdeclaration the penalty may be avoided, and otherwise the penalty may be reduced to take account of the permissible circumstances.

The Evidence and Findings of Fact

We heard oral evidence from Richard Stone, a chartered accountant, who had acted for the Appellant at the relevant time and who had some 10 years acquaintance with it; and from Leslie Bingham a member of the Respondents' appeals team who amongst other things gives consideration to the rate of mitigation applied to penalties assessed by the Commissioners. We also had before us various copy documents. We find as follows.

The shares in the Appellant are owned by Mr Cater and his wife. The Appellant is a holding company. At the relevant time it had a number of wholly owned subsidiaries including Nexus Resources Ltd. None of the subsidiaries were VAT grouped with Cater Clark or each other.

Mr Cater is in his sixties. He has been winding down. In or around 2004 Cater Clark Ltd sold a subsidiary. The group's bookkeeper was employed by the departing subsidiary and left the group's employ. She was not replaced. Prior to her departure from the group the VAT returns for the Appellant were completed by her; after her departure they were completed by other persons at the Appellant with advice and assistance from Mr Stone and a member of his staff.

The Appellant provided services to Nexus Resources Ltd. These services were remunerated in consideration for a percentage of Nexus Resources' annual sales. This change was calculated after the end of each accounting period as part of the exercise of drawing up the companies' accounts. That exercise was conducted each year by Mr Stone and his colleagues. The amount of the charge was in each relevant year shown as an expense in Nexus Resources' accounts and as income in the Appellant's accounts. No specific cash sum was paid by Nexus Resources to the Appellant instead the sum was added to (or subtracted from) the inter company debtor or creditor balance in each of the company's accounts.

No invoice was raised by the Appellant in respect of these charges. As a result in compiling the Appellant's VAT return (and that of Nexus Resources) no account was taken of the supplies. Nexus Resources was a registered taxable person whose outputs were such that it recovered all its input tax. As a result in any period in which a supply of these services was to be treated as made, the Appellant's VAT return understated the value of its taxable supplies by the value of the supply, and the VAT return of Nexus Resources understated its allowable VAT inputs by the value of the supply.

One of the Respondents' officers conducted an audit visit to Cater Clark Ltd in February 2007. She noticed a discrepancy between the total outputs declared on its VAT returns and its turnover as shown in its accounts for 2004, 2005 and 2006. This discrepancy was the amount of the uninvoiced service charge to Nexus Resources Ltd by the Appellant. The total uninvoiced and undeclared net amount was £213,600. The Commissioners made VAT assessments for each of the three years to a total of £37,379.

The Appellant did not appeal against these assessments, but in March or April 2007 it issued a VAT invoice to Nexus Resources which then made claims for the repayment of underdeclared input VAT of the same aggregate amount.

The other taxable supplies of the Appellant in each of 2004, 2005, and 2006 were either nil or negligible in comparison to the service supply made to Nexus Resources.

Cater Clark's year end is 30 April. At that stage its inter company account with other group members are reconciled and agreed. These accounts include entries in respect of dividends and cash loans between the group members.

On 18 April 2007 the Commissioners wrote to the Appellant notifying the assessment of a penalty "under Section 64 VAT Act 1994". The Commissioners applied 10% mitigation to the determination of the penalty. Mr Memery wrote on behalf of the Appellant on 25 April seeking further mitigation, and on 31 May 2007 the Commissioners replied that they would mitigate the penalty by 80% and that the penalties would be reduced accordingly. It was from this mitigated penalty assessment under section 64 that the Appellant initially appealed to the tribunal.

Following the tribunal allowing the appeal against the section 64 penalty (for the reasons which are discussed below and as described in the early paragraphs of this decision) the Commissioners assessed the section 63 penalties which are now the subject of this appeal and decision. These penalties were determined to be subject to 80% mitigation.

The Commissioners applied 80% mitigation to take account of the following factors (each of which we find to be factually correct):-

(i) that the Appellant had, when its mistake had been raised with its staff, been open about it and had co-operated well with the Respondents' officers;

(ii) the Appellant had taken steps to rectify the misdeclaration;

(iii) the Appellant had a good compliance history. A couple of years previously it had made a small mistake in relation to the VAT on a car fuel charge. There may have been one other small error. Its VAT returns had been submitted on time and VAT paid timeously;

(iv) the Appellant's cooperation had saved the Commissioners time and resources.

The mitigation determined by the Commissioners was calculated by applying a percentage for each of these factors and aggregating the total. The percentages were derived from their published guidance.

The Section 64 Penalty – Our decision

We should briefly describe why we allowed the appeal against the section 64 penalty.

Section 64(2) and (3) provide that where there is a material inaccuracy in a VAT for a period and:

"(b) the Commissioners serve notice on the person concerned (a "penalty liability notice") specifying a penalty period or the purposes of [section 64],

(c) that notice is served before the end of 5 consecutive … periods beginning with the period in respect of which there was the material inaccuracy,

(d) the period specified in the notice is the period of 8 consecutive accounting periods beginning with that in which the date of the notice falls" then, if there is another material inaccuracy in respect of any period falling within the specified penalty period, a penalty may be assessed.

Thus in order for a section 64 penalty to have been assessed in respect of any 2004, 2005, or 2006 period, that period must have come after the service of a penalty liability notice.

No penalty liability notice was served before any of those periods. Therefore no section 64 penalty can be due.

It is true that after the section 64 assessment a penalty liability notice was served. But that is not good enough to validate any penalty under section 64 in respect of a period before the service of the notice.

The appeal against the section 64 penalty is therefore allowed.

The section 63 penalty – Our decision

There is one further matter we should relate in relation to the section 63 penalty assessment. Initially the Respondents acting through Mrs Crinnion and Mr Bingham thought that they were out of time to assess a penalty in respect of 06/04, and their initial manuscript amended letters therefore notified assessments only for 06/05 and 06/06. Then, following a conversation with their colleagues elsewhere they changed their minds and decided they could, and therefore did, assess a penalty for 06/04. These comings and goings upset the Appellant's representatives somewhat, but they were a result of haste induced by the Tribunal's request that it be done speedily. The Tribunal chairman apologised to the Appellant for the confusion caused.

The issues for us in relation to the section 63 penalties are these:-

(i) were they validly made: were they in time and were the conditions in section 63(1) satisfied?

(ii) was there a reasonable excuse for the conduct occasioning the misdeclaration (this is equivalent to the test in section 64(5) as to whether there was a reasonable excuse for the inaccuracy)?

(iii) what level of mitigation is appropriate if the answers to the preceding questions are Yes and No respectively? We note that the Commissioners' guidelines as to mitigation are not binding on this Tribunal.

It appears to us that, subject to one issue, the section 63 penalties were made in circumstances where the section 63(1) conditions were satisfied: returns for the relevant periods had been made which understated the Appellant's liability by more than 30% of gross VAT for those periods.

The issue mentioned in the last paragraph is the question of the time of the supply of the services by the Appellant to Nexus. It seemed likely to us that the services supplied by the Appellant were services "supplied for a period for a consideration the whole or part of which is determined or payable periodically or from time to time" within Regulation 90(1) VAT General Regulations 1995. As a result the time of supply was to be determined by that regulation rather than by section 6 VATA. Regulation 94B did not apply because since Nexus was entitled to credit for all the input VAT Regulation 94B(3) disapplied it. Regulation 90 treats supplies within its ambit as being made at the earlier of the following times:

(a) each time a "payment in respect of the supplies is received by the supplier"; and

(b) each time the supplier issues a VAT invoice in respect of the supplier.

The Appellant issued its invoice in respect of the supply of the service in March or April 2007: therefore unless payment was received before then, the date of the supply of all three years' services was March or April 2007 and not in 2004, 2005 and 2006. This raised the question as to whether the accounting in the books of the Appellant and Nexus for the amount which was due was "payment" in respect of the supply.

Whilst "payment" can mean something other than the simple transfer of cash, its meaning will depend upon the context. Mr Bingham indicated that it was HMRC's view that the payment was made when the accounts were signed. We note that in Customs & Excise Commissioners v Svenska International 1999 STC 406, when an invoice was issued representing 5 years accrued supplies there seems to have been no argument that any accrual of the amounts receivable and payable constituted payment. We also note that the purpose of Regulation 94B appears to be to deal with the issue of the provision of services between group companies which are not VAT grouped where neither regular payment nor invoicing occurs, and the recipient company could not reclaim all its tax. That at the least suggests that `payment' in Regulation 90 may not encompass the accrual of rights and liabilities in the accounts of the companies concerned.

There was no appeal against the assessment raised, and Mr Memery did not argue that the assessment was wrong or in consequence that the conditions in section 63 (or the corresponding condition in section 64) had been failed. But this question of the time of the supply raises difficulties.

Leaving aside for the moment those difficulties, it appears that the penalty assessments issued on 22 November 2007 were issued in time. Section 77(2) permits an assessment of a section 63 penalty to be made at any time before the expiration of two years after the amount due for the period "has been fixedly determined". The assessments for 06/04, 06/05 and 06/06 were made on 19 March 2007. They were not appealed. It seems clear that the penalty assessment was therefore made within the time limit (see also Ali (t/a Vakus Balti) v RGC Commissioners 2007 STC 612).

Was there a reasonable excuse for the apparent underdeclaration? Mr Stone said that if an invoice had been issued then it would have been accounted for on the VAT return: the problem was that an invoice was not issued. It was clear to us that the Appellant relied upon Mr Stone and his colleagues but the reason for the failure to issue an invoice (or, if it was a failure, the failure to account for the VAT on the consideration represented by the inter company balances) was not due to any "inaccuracy or dilatoriness" of Mr Stone nor simply due to reliance upon Mr Stone. There therefore seems to be nothing which section 71 requires us to ignore in deciding whether the failure to account for the VAT (if it was a failure) had a reasonable excuse.

It seems to us that in circumstances where there is some uncertainty as to whether the mere accrual of the charge gave rise to a VAT liability, the Appellant does have a reasonable excuse for its failure.

As a result section 63(10) applies and no liability to a misdeclaration penalty under section 63 arises.

If we were wrong the issue as to the mitigation to be applied under section 70 would be relevant. Mr Memery urged upon us that 100% mitigation would be appropriate having regard to the nature of the mistake, the Appellant's compliance record, and its cooperation with the Commissioners.

We ignore the fact that, because Nexus can recover all its input VAT, no VAT has been lost, and we take no account of whether anyone acted in good faith. But taking into account our concerns about the time of the supply, the technical nature of the breach if there was one, the Appellant's compliance record and its cooperation we would have applied 100% mitigation.

We allow the appeal. Our decision was unanimous. We make no award of costs.

CHARLES HELLIER

CHAIRMAN

RELEASED: 25 January 2008

LON 2007/1059