Neil Warren explains why HMRC was correct to raise penalties for input tax claims on invalid purchase invoices and to send the bill to the acting director of the company.
There were a few twists to the case of Sacutia Healthcare Ltd (TC06844), not least the fact that the driving force behind the company (Ronald Barnes) was not a director of the company, as this position was held by his daughter.
However, HMRC still considered that Barnes “personally gained or attempted to gain” from VAT errors, so a penalty assessment for “deliberate not concealed behaviour” was charged to him rather than to the company.
Nature of mistakes
There were three different errors, producing a total VAT assessment of £57,839.
There was a lack of paperwork for supposed exports of goods and documents were made out to another of Barnes’ companies (Cleanliness Ltd) and HMRC confirmed that there was no record of Sacutia as an exporter. There was an amusing comment that HMRC could only prove that one shipment had got as far as Doncaster and no further – this was not an export.
Output tax was not properly dealt with on deposits received from customers. A tax point is created by a receipt of payment in advance of a supply – the company seemed to only declare output tax on the balancing payments and not some of the deposits.
Input tax evidence
The company claimed input tax on supplies of goods from Sigma Soap Enterprises Ltd where invalid invoices had been issued, and there was confusion about pro-forma and VAT invoices, which had caused mistakes in Sacutia’s accounting records.
Basis of appeal
The company did not dispute the errors relating to export evidence and output tax on deposits but did challenge the disallowed input tax on invoices from Sigma. However, Sacutia Ltd also appealed total penalties of £24,072 issued on errors in all three categories, on the basis that the errors were caused by ‘careless behaviour’ and should be subject to a suspended penalty and were not ‘deliberate not concealed behaviour’.
Barnes claimed that he was “not a detail man” and left everything to his accountants. HMRC highlighted that the information he gave his accountants was incomplete, and he had not answered their queries to enable them to establish more accurate figures. HMRC also claimed that Barnes had been involved with previous VAT registrations that had involved issues with lack of input tax evidence and incomplete export documentation. Due to this earlier experience he should have understood his responsibilities.
HMRC highlighted that £130,000 of sales had been excluded from the June 2014 VAT return and Barnes should have been aware of this enormous deficiency. The correct approach would have been to alert his accountants of a problem with the figures, as he did not do this, his inaction represented a deliberate attempt to underpay VAT.
The tribunal dismissed the appeal, apart from one minor amendment when a penalty in September 2013 had been treated as ‘deliberate and concealed’ rather than ‘deliberate not concealed’. In that case the penalty was reduced from £1,237 to £866. All the penalties for other periods had been correctly based on ‘deliberate not concealed’ behaviour.
Judge Anne Fairpo in her summing up said: “We consider that a taxpayer has the required ‘knowledge’ for an inaccuracy to be deliberate where the taxpayer knows that they should take steps to check accuracy before information is submitted or relied upon.”
It would be a very dangerous situation if a taxpayer could escape behavioural penalties based on “not being a detail man,” therefore trying to argue that a penalty based on careless rather than deliberate behaviour should be applied. This is a weak argument, and should not be used.
The challenge for a taxpayer is to be able to clearly show why errors have not been made deliberately. This is all about knowledge, behaviour and intentions at the time of completing relevant accounting records and VAT returns.
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.