The fine line between deliberate and careless behaviour

Balancing act
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Neil Warren considers the case of Faux Properties (a partnership) (TC7051) where a big property sale was not deliberately omitted from a VAT return.

Faux Properties registered for VAT in order to opt to tax a commercial property in Warrington and claim input tax on the repair costs. It sold the property for £179,000 plus VAT of £33,800 on 20 March 2015, but submitted a nil VAT return for the period ending 30 May 2015, omitting output tax on the sale.

HMRC identified the omission when it checked the input tax claim of the buyer and raised an assessment. This cross-checking is an integral part of HMRC’s control procedures. The tax authority check that input tax claimed by one business is correctly declared as output tax by the supplier. In the Faux Properties case, this cross-checking highlighted the omission.

Penalty and assessment

HMRC raised an assessment to recover the tax, but a penalty was also due. HMRC decided the taxpayer’s behaviour in making the omission was “deliberate” but the error was “not concealed”, and HMRC prompted the declaration of the mistake.
 
These factors resulted in a penalty range of between 35% and 70% of the tax underpaid. The penalty was discounted to 45.5% because the taxpayer gave some help and assistance to HMRC, so the final penalty was £15,379.
 
The senior partner claimed that the omission was a “basic administrative error” rather than a deliberate action, and he also said that a former employee had completed the nil VAT return, although there was no evidence to support this claim.

Deliberate or careless

There is often a fine line between ‘careless’ or ‘deliberate’ taxpayer behaviour, which has resulted in a VAT underpayment. My background as an ex-Customs and Excise VAT officer makes me less inclined to accept the ‘careless’ argument in some cases.
 
I would certainly question how a business solely registered for VAT as a result of one commercial property could forget to account for the VAT on its eventual sale for a large amount of money.
 
However, it could be argued that a person trading in property has to think about many different taxes (Stamp Duty Land Tax, self-assessment income tax, and potentially ATED) so a VAT oversight could be understandable in some cases.

HMRC guidance

The key guidance on deliberate errors is contained in HMRC’s Compliance Handbook CH81150, and there is an unambiguous definition about what the department perceives as a deliberate inaccuracy:
 
A deliberate but not concealed inaccuracy occurs when a person gives HMRC a document that they know contains an inaccuracy. It is not necessary to demonstrate that the person knew what the accurate figure was, only that they knew that the figure they put on the document was not accurate.

The decision

There was one big surprise in this case; the tribunal judge was sympathetic to a ‘serious health condition’ of the lead partner, which had caused him much anxiety, and decided that the penalty should be downgraded from deliberate to careless.
 
The tribunal has the power to correct the behaviour category if it thinks HMRC has got it wrong. This appeal was therefore partly successful.

Learning points

Don’t forget that the onus is on HMRC to prove that an error was deliberate, based on civil standards and the balance of probabilities. For tax assessments, the onus is on the taxpayer to prove that HMRC’s calculations are flawed if, for example, an assessment is raised using the officer’s best judgment. 
 
The reality is that a taxpayer is more likely to be successful with an appeal against a penalty than an assessment, as in the case of Faux Properties. 
 
I feel this was a surprising victory for the taxpayer, and another judge may have seen the situation very differently. It was even more surprising considering the judge’s comment that he had a ‘degree of scepticism’ about the taxpayer’s evidence.
 
It seems that tribunals are often prepared to give taxpayers the benefit of the doubt in penalty appeals, which is good news for our clients. 

About Neil Warren

Neil Warren

Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.

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20th May 2019 11:39

@Neil.

I would have to respectfully disagree with the heading of your above article.

You state that the case was one in which the FTT decided that the “big property sale was deliberately omitted from a VAT return”.

The case of course related to the imposition of a Penalty under Sch.24 Finance Act 2007, here:-

https://www.legislation.gov.uk/ukpga/2007/11/schedule/24.

The FTT’s decision, in relation to the VAT Return submitted, was (at paragraph 45) that “the inaccuracy was NOT (emphasis added) deliberate”.

My INITIAL impression was that the learned Judge's decision per paragraph 45 was inconsistent with his comments, in paragraph 32, in which he said that Mr Faux “took the DELIBERATE (emphasis added) decision to hold onto the VAT”.

However, the learned Judge’s comments in that regard refer to Mr Faux’s actions AFTER he had found out that the incorrect nil VAT Return had been submitted.

The learned Judge was therefore drawing a clear distinction between Mr Faux’s (i) having NOT deliberately submitted an incorrect VAT Return, and his (ii) having LATER decided not to take any action to notify HMRC of the erroneous VAT Return.

It is indeed the above distinction which is crucial in the Judge’s decision that the property sale was NOT “deliberately omitted from the VAT return”.

Basil.

PS. I must confess that I found somewhat amusing the name of the Appellant [“Faux” – French !]

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to fawltybasil2575
20th May 2019 15:37

I have fixed the lead-off. My mistake, in my rush to get the article up "not" got lost.

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avatar
21st May 2019 17:03

This is related to what is said in the link below (e.g. Justin Bryant to Tax Dragon 04th Dec 2018 13:43) and so is perhaps not too surprising:

https://www.accountingweb.co.uk/any-answers/taxpayer-duty-to-inform-hmrc...

Perhaps a more relevant recent VAT case re deliberate/careless distinction is here at para 63 et seq:

https://www.bailii.org/uk/cases/UKFTT/TC/2019/TC07139.html

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