Neil Warren reports how HMRC made a complete mess of pinning VAT penalties on a director after his company went into liquidation.
A retired accountant once expressed the view to me that HMRC sometimes struggles to get to grips with cases where there is poor record keeping, confused ownership and a difficult trading scenario: “That’s why they like the easy assessments, usually issued against compliant traders,” he said.
The FTT case of Darren Cresswell (TC06274) was certainly a bad day at the office for HMRC. It was confused by Cresswell’s trading companies: We Are Electricals Ltd and the company that took over a lot of its business in September 2011: WAE+ Ltd.
Both companies had the same shareholders and directors – Cresswell and Ben Slater – but there was some muddle about the correct registered address of We Are Electricals Ltd, as it was changed several times.
HMRC’s main evidence was that We Are Electricals Ltd had purchased £2.9m of goods from a French supplier, but none of these acquisitions were reflected on the company’s VAT returns. The purchases had been identified from figures declared on the EU Sales Lists submitted by the French supplier.
HMRC applied a 5% markup to these purchases to establish an underpaid output VAT figure of £610,291. They also identified a discrepancy of £138,773 between declared outputs on VAT returns and turnover figures shown on the annual accounts for the period to 29 June 2011, with there being more sales shown on the accounts than on the VAT returns. HMRC issued assessments for a total of £612,078 and the repayments of VAT claimed on returns for the quarters to March and December 2012 were reduced by £48,768.
Why pursue the director?
Why was this case brought to tribunal by Cresswell rather than by We Are Electricals Ltd, which received the VAT assessments for £612,078? Well, HMRC issued penalties to the company totalling £416,415 in relation to the “deliberate and concealed” omissions from its VAT returns. But We Are Electricals Ltd went into liquidation, so it couldn’t pay the penalties or the VAT due. So HMRC made the two directors jointly liable for the VAT penalties raised for £416,415, Cresswell’s share being £208,207.
Personal Liability Notice
HMRC used the powers given by FA 2008, Sch 41, to raise a Personal Liability Notice (PLN) against Creswell. These notices are only relevant to penalties and not to actual tax assessments. But in another bizarre twist to this case, even if the penalty had been correct (it was not), the tribunal found that it was issued out of time in accordance with FA 2007, Sch 24, para 19.
Cresswell’s representative argued that the purchases of goods from France were relevant to WAE+ Ltd and that the only error made by the directors had been to give the French supplier the wrong VAT registration number: ie the old number of We Are Electricals Ltd, which seemed to cease trading in mid-2011.
There were certainly some strange discrepancies with the accounting: for example, the total acquisitions made by We Are Electricals and WAE+ appeared to be £441,336, a much lower figure than the alleged £2.9m of purchases from the French company. But the taxpayer disputed this figure. Perhaps the French supplier had made errors recording the amounts it entered on his EU sales list?
Another confusing issue was caused by the fact that the company’s accounts to 28 June 2011 were superseded by corrected accounts for a longer period to 29 November 2011. The June accounts supposedly overstated sales by not properly recording refunds and cancelled orders, an error which was corrected in the November 2011 accounts.
The tribunal concluded that HMRC had not correctly established the potential lost revenue (PLR) because the officer had not considered the sales made by WAE+ Ltd, and did not take into account the figures on the November 2011 accounts, which superseded those for June 2011.
In the absence of an accurate PLR figure, a penalty notice cannot be issued. The key comment was: “it is for HMRC to prove that the VAT returns were wrong” – HMRC failed to do this.
There is no doubt about it – this was not a good case for HMRC!
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.