Accountant not guilty of VAT fraudby
The first tier tribunal dismissed a client’s claims that her accountant acted negligently and without her knowledge. It also upheld the penalty issued for deliberate and concealed errors.
In the case of Shaneika Clarke (TC8133), HMRC raised an assessment for £37,228 in relation to VAT errors for the period ending September 2012.
But the main point to this case is that HMRC also issued a penalty for ‘deliberate and concealed’ errors for £75,962. This was because the taxpayer, who traded as a vehicle hire business, allegedly created “fake invoices” meaning that her input tax claim “was grossly inflated”.
Penalty rate: 204%
The maximum penalty for ‘careless errors’ made on a VAT return is 30% of the potential lost revenue (PLR). For example, if I carelessly claimed input tax of £1,000 on a zero-rated air-fare, this would be a maximum potential penalty of £300.
The penalty rate increases to a maximum of 70% of the PLR for an underpayment that is ‘deliberate but not concealed’ and then 100% for one that is ‘deliberate and concealed.’ The onus is on HMRC to prove that a taxpayer’s behaviour falls into of these categories, the standard of proof is based on the balance of probabilities.
How could a £75,962 penalty be issued in relation to an assessment for £37,228 – a rate of 204%? This exceeds the 100% maximum figure. Here is a possible answer:
John deliberately inflated the input tax claim on his May 2021 VAT return by £75,000, creating false purchase invoices from non-existent suppliers. On the same return, he made arithmetical mistakes that meant he had overpaid output tax by £30,000. HMRC issued an assessment for £45,000 plus a 100% penalty of £75,000 for ‘deliberate and concealed’ input tax entries. This means John pays a penalty of 160% of the VAT assessment of £45,000.
Accusations against accountant
The second horror issue in this case is the serious allegations made by the taxpayer against her accountant:
- Accused him of registering her for VAT as a sole trader without her knowledge.
- Said it should have been her limited company: Burton Car Rentals Ltd that should have been VAT registered instead and the accountant had therefore registered the wrong entity. This was strange, because the company was not incorporated until 19 March 2012, so how could it have been registered for VAT in February 2011?
- Accused him of embarking ‘on a frolic of his own’ and ‘acting negligently’ – in other words, carrying out tasks that extended beyond the instructions given to him.
- Alleged the accountant had kept HMRC’s investigation into her VAT returns a secret and she knew nothing about it.
The judge found no evidence that the accountant had been either negligent or deceptive and there was not a “scintilla of evidence” to suggest this had been the case. The taxpayer had submitted a “grossly inflated claim for repayment of input VAT” which HMRC had rightly corrected and penalised. The appeal was dismissed.
A massive VAT assessment for major input tax errors; a big penalty for deliberate and concealed behaviour; allegations that an accountant had behaved improperly – this case has it all. The final words should be left to the judge:
“In the circumstances where we have already concluded that it was more likely than not that the Appellant provided fabricated invoices to her accountant it seems to us that we are led to the inevitable conclusion that her behaviour was both deliberate and concealed.”
An important learning point from this case is that records of conversations and decisions agreed with clients must always be properly recorded. You never know what comebacks there might be in the future.