Dance with Mr D Ltd v Revenue and Customs (VAT - PENALTIES : Late registration) [2017] UKFTT 374 (TC)

FTT-Tax

Dance with Mr D Ltd v Revenue and Customs (VAT - PENALTIES : Late registration)

[2017] UKFTT 374 (TC) · 2016-08-03

[38]Schedule 41 of the Finance Act 2008 provides a penalty regime for failures to comply with obligations to notify liability in respect of various taxes, including notification of liability to register for VAT.

[39]Paragraph 6 of Schedule 41 sets outs the penalties for failures to notify. These depend upon the degrees of culpability defined in paragraph 5. For a failure to notify liability for VAT registration the penalties are:(1) 100 per cent of the potential lost revenue for a deliberate and concealed act or failure.

(2) 70 per cent of the potential lost revenue for a deliberate but not concealed act or failure.

(3) 30 per cent of the potential lost revenue for any other case.

[40]Paragraphs 12 and 13 of Schedule 41 provide for reduction of the penalty where the tax payer discloses a relevant act or failure. Paragraph 12 distinguishes between unprompted and prompted disclosures. 41. Paragraphs 13(3)(a) and 13(3)(b) give a discretion to reduce the 30 per cent penalty for any other case (in paragraph 6(3)) to a specified minimum depending on the type of disclosure. Where HMRC becomes aware of the failure to notify VAT registration less than 12 months after when the tax first becomes unpaid by reason of the failure, the specified minimum is ten per cent for prompted disclosure and nil per cent for unprompted disclosure. Where HMRC becomes aware of the failure 12 months or after when the tax first becomes unpaid the specified minimum is increased to 20 per cent for prompted disclosure and 10 per cent for unprompted disclosure.

[42]Paragraph 14 of schedule 41 enables HMRC to reduce a penalty generally if HMRC thinks it right because of special circumstances. Paragraph 14(2) states that special circumstances do not include ability to pay or the fact that a potential loss of revenue from one tax payer is balanced by a potential over payment by another.

[43]Paragraph 19(2) permits the Tribunal on an appeal against the amount of a penalty to affirm HMRC’s decision or substitute for HMRC’s decision another decision that HMRC had power to make. In respect of the substitution the Tribunal may rely on special circumstances but only if the Tribunal thinks that HMRC’s decision on the application of special circumstances is flawed. Paragraph 19(4) defines flawed as flawed when considered in the light of the principles applicable in proceedings for judicial review. Decision44. We note that it is agreed that the appellant’s failure to register for VAT was non-deliberate and the disclosure was unprompted.

45. The penalty for an unprompted disclosure made more than twelve months after the tax became due is 30%, which may be reduced by the quality of disclosure to no less than 10%. In this case, the penalty was reduced by HMRC to 12%.

46. The question being considered, therefore, is whether special circumstances or a reasonable excuse apply to justify a reduction in the penalty. The appellant has not argued that any reasonable excuse applies, and the grounds of appeal are that a genuine mistake was made. As it is well-established that a mistake alone is not sufficient grounds for reasonable excuse, the only issue remaining is whether there were special circumstances which justify a reduction in the penalty.

[47]Schedule 41 of Finance Act 2008 does not define “special circumstances”, although it does state that ability to pay and the fact that a potential loss of revenue from one person is balanced by a potential overpayment to another cannot amount to special circumstances. Neither is in point here.48. As noted in James Hillis (at 23), “HMRC’s policy defines special circumstances as either uncommon or exceptional or where the strict application of the penalty law produces a result that is contrary to the clear compliance intention of the law. The Tribunal in Collis v HMRC

[2011] UKFTT 588 (TC)

ruled that the circumstance in question must operate on the particular individual, and not be a mere general circumstance that applies to many taxpayers by virtue of the scheme of the provisions themselves”.

49. We note the decision in James Hillis but also note that the decision is not binding on this Tribunal; indeed, as stated in James Hillis (at 24) the question must be considered with regard to the appellant’s individual circumstances.

50. We consider that the essence of the appellant’s case is that special circumstances should be considered to apply because his business involves overseas activities and income, and involves related parties and so he had to rely upon his original accountants’ advice as to whether he should be registered for VAT.

51. We consider that in the time period involved there is no automatic unusual complexity in a business which as overseas activities and income, and involves related parties. No evidence was presented to us to explain why the appellant’s business had particular difficulties with regard to identifying its VAT liability that would not have applied to other taxpayers in a similar position.

52. In the absence of any such evidence, we do not consider that the nature of the appellant’s business amounts to special circumstances. All that remains of the contention therefore is reliance on a third party, the original accountants. It is well-established that reliance on a third party cannot amount to a reasonable excuse; we consider therefore that it cannot amount to special circumstances either as that would render redundant the principle in respect of reasonable excuse.

53. Accordingly, we find that there are no “uncommon or exceptional” circumstances which amount to special circumstances.

54. We have also considered the alternative, that “the strict application of the penalty law produces a result that is contrary to the clear compliance intention of the law”. In this case, the delay in notifying HMRC was twenty-eight months, and the level of turnover was almost ten times the level of the VAT registration threshold. In the circumstances, we consider that this is not a marginal failure to realise that VAT registration applied.

55. Whilst there is a compliance intention to the law, we consider that the law is not intended only to discourage deliberate non-compliance but is also intended to discourage a relaxed approach to compliance. A taxpayer cannot escape a penalty through special circumstances simply because they did not deliberately intend to fail to notify registration; if that was the case, there would be no policy reason for the legislation to set a minimum penalty for an unprompted disclosure of liability which is made more than twelve months late. As there is such a minimum penalty, we consider that it must be the case that, for special circumstances to apply, those circumstances must involve something more than a non-deliberate failure to notify particularly where the delay is more than twelve months.

56. We therefore find that the fact that the appellant did not intend to deliberately fail to notify his liability does not mean that the penalty law produces a result that is contrary to the clear compliance intention of the law. As such, the appellant’s lack of deliberate intention does not amount to special circumstances. As we have already found that the nature of the appellant’s business and his reliance on his original accountants do not amount to special circumstances, we find therefore that there are no special circumstances which apply to reduce the penalty in this case.

57. Turning therefore to the amount of the penalty, we note that HMRC gave only a 25% reduction for “Telling”, rather than the full 30% reduction possible. The reason for this was stated to be delays in correspondence, but HMRC have also accepted the appellant’s explanation for the delay in correspondence.

58. On that basis, and in exercise of our powers under paragraph 19(2) of Schedule 41, Finance Act 2008, we find that the reduction for “Telling” should be increased to 30% from 25%.

59. We do not consider that the reduction for “Helping” should be increased further, however, as we consider that the appellant failed to make proper provision for correspondence in his absence, particularly once correspondence with HMRC on these matters had begun.

60. Accordingly, we find that the penalty reduction should be 95%. When applied to the difference between the maximum penalty rate of 30% and the minimum penalty rate of 10%, that gives a revised penalty rate of 11% in place of the 12% calculated by HMRC.

61. The Tribunal therefore dismisses the appeal as to special circumstances but substitutes the penalty of £41,666.00 with a penalty of £38,194.

62. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice. ANNE FAIRPO TRIBUNAL JUDGE RELEASE DATE: 4 MAY 2017