Akin Kog v The Commissioners for HMRC [2026] UKFTT 40 (TC)

[2026] UKFTT 00040 (TC)Case No TC09741
FIRST-TIER TRIBUNAL
TAX CHAMBER
Hearing Heard on: 14 July 2025 with written closing submissions received in September and November 2025Date Judgment date: 08 January 2026
In public by remote video hearing
Appeal reference: TC/2023/01551
VAT – option to tax – whether made – company failure to account for output tax on rent and proceeds of sale- company penalty due to deliberate inaccuracy by the appellant – PLN issued to appellant – direct knowledge of option – no – blind eye knowledge – yes – appeal dismissed
Before
TRIBUNAL JUDGE NIGEL POPPLEWELL
Between
AKIN KOGAppellantTHE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMSRespondentIn person for AppellantMargaret Nkonde litigator of HM Revenue and Customs’ Solicitor’s Office for RespondentsDECISION

INTRODUCTION

[1]This is a VAT case. My decision deals with an appeal against a personal liability notice (“the PLN”) which was issued by HMRC to the appellant on 21 November 2023. The amount of the PLN is £38,749.73.[2]The PLN relates to the sale of a property at 81-83 Warwick Road, Solihull (“theproperty”) which was sold on 12 January 2016.[3]The property was owned by a company, World Sky Travel Ltd (“the company”) of which the appellant was a director.[4]It is HMRC’s case that the company had opted to tax the property and thus was liable to account for VAT on the sale. The company failed to submit a return which recorded this liability. This failure was due to the deliberate behaviour of the appellant as a director of the company, and accordingly he is personally liable for a large proportion of that VAT.[5]The appellant does not now dispute that the property was opted. His case is that the company’s failure to submit a VAT return which recorded its liability to account for VAT on the sale was not a result of deliberate behaviour on his part.[6]For the reasons given later in this decision, I have decided to dismiss the appeal.

THE LAW

[7]There was no dispute about the relevant law regarding liability to VAT or to penalties for submitting an inaccurate return. I summarise this below.[8]Under the VAT Act 1994, VAT is chargeable on taxable supplies of goods or services. A taxable supply is any supply other than an exempt supply.[9]The supply of commercial property is, generally, an exempt supply. But a taxpayer may turn it into a taxable supply by making an option to tax.[10]A taxpayer who makes taxable supplies has an obligation to submit VAT returns (in this case on a quarterly basis) which accurately reflect the taxpayer’s liability to VAT for that quarter. The taxpayer must also pay any liability for VAT on those supplies (“output tax”).[11]A taxpayer who pays VAT on the supply to him of any goods and services (“input tax”) is entitled to credit for any input tax which is attributable to taxable supplies made by the taxpayer, who can offset the input tax against the output tax for which it would otherwise be liable.[12]Under Schedule 24 to the Finance Act 2007, a taxpayer who submits an inaccurate return is liable to a penalty. The amount of the penalty is a proportion of the potential lost revenue arising from that inaccuracy.[13]Where the inaccuracy is due to the deliberate but not concealed behaviour of the taxpayer, the maximum proportion is 70% of the potential lost revenue.[14]Where a penalty for submitting an inaccurate return is payable by a company for a deliberate inaccuracy which was attributable to an officer of the company, the officer is liable to pay such portion of the penalty (which may be 100%) as HMRC may specify by written notice to the officer. This is colloquially known as a personal liability notice.[15]The Supreme Court considered the meaning of “deliberate” in relation to whether there was a deliberate inaccuracy in a document in HMRC v Tooth [2021] 1 WLR 2811(“Tooth”) in which it said:
“42. The question is whether it means (i) a deliberate statement which is (in fact) inaccurate or (ii) a statement which, when made, was deliberately inaccurate. If (ii) is correct, it would need to be shown that the maker of the statement knew it to be inaccurate or (perhaps) that he was reckless rather than merely careless or mistaken as to its accuracy. 43. We have no hesitation in concluding that the second of those interpretations is to be preferred, for the following reasons. First, it is the natural meaning of the phrase “deliberate inaccuracy”
. Deliberate is an adjective which attaches a requirement of intentionality to the whole of that which it describes, namely “inaccuracy”. An inaccuracy in a document is a statement which is inaccurate. Thus the required intentionality is attached both to the making of the statement and to its being inaccurate”.[16]Although this was said in relation to a different statutory provision (s 29 of the Taxes Management Act 1970) the Supreme Court recognised, at [33] and [45], the alignment of the language used with that of the schedule 24 penalty provisions. Accordingly, for there to be a “deliberate” inaccuracy HMRC have to establish an intention “to mislead the Revenue on the part of the taxpayer as to the truth of the relevant statement or, perhaps, (although it need not be decided on this appeal) recklessness as to whether it would do so”. (see Tooth at [47]).[17]CPR Commercials Ltd v HMRC [2023] UKUT 00061 (“CPR”) contains a summary of the case law on deliberate behaviour at [18] to [21]. It has this to say about “blind-eye” knowledge. “22. HMRC contended that the test may be satisfied by proof of ‘blind-eye’ or ‘Nelsonian’ knowledge of the inaccuracy (see Clynes v HMRC [2016] UKFTT 369 (TC) at [86] and Chohan Management Ltd v HMRC [2021] UKFTT 0196 (TC) at [111] – [113]). Mr Bedenham for CPR did not disagree with that proposition but, as we set out in more detail below, submitted that the FTT did not make any finding that CPR took a deliberate decision to shut its eyes to the truth or refrain from making further enquiries so as to avoid discovering the true position. Ms Robinson for HMRC contended that the FTT found that CPR had actual or, at the very least, blind-eye knowledge that the returns submitted contained inaccuracies. 23. In our view, where a taxpayer suspects that a document contained an inaccuracy but deliberately and without good reason chooses not to confirm the true position before submitting the document to HMRC then the inaccuracy is deliberate on the part of the taxpayer. If it were otherwise then a person who believed there was a high probability that their return contained errors but chose not to investigate would never be subject to a deliberate penalty. However, the suspicion must be more than merely fanciful. Lord Scott of Foscote urged caution in this context in Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd [2001] UKHL 1 at [116]:
“In summary, blind-eye knowledge requires, in my opinion, a suspicion that the relevant facts do exist and a deliberate decision to avoid confirming that they exist. But a warning should be sounded. Suspicion is a word that can be used to describe a state-of-mind that may, at one extreme, be no more than a vague feeling of unease and, at the other extreme, reflect a firm belief in the existence of the relevant facts. In my opinion, in order for there to be blind-eye knowledge, the suspicion must be firmly grounded and targeted on specific facts. The deliberate decision must be a decision to avoid obtaining confirmation of facts in whose existence the individual has good reason to believe. To allow blind-eye knowledge to be constituted by a decision not to enquire into an untargeted or speculative suspicion would be to allow negligence, albeit gross, to be the basis of a finding of privity””. “In summary, blind-eye knowledge requires, in my opinion, a suspicion that the relevant facts do exist and a deliberate decision to avoid confirming that they exist. But a warning should be sounded. Suspicion is a word that can be used to describe a state-of-mind that may, at one extreme, be no more than a vague feeling of unease and, at the other extreme, reflect a firm belief in the existence of the relevant facts. In my opinion, in order for there to be blind-eye knowledge, the suspicion must be firmly grounded and targeted on specific facts. The deliberate decision must be a decision to avoid obtaining confirmation of facts in whose existence the individual has good reason to believe. To allow blind-eye knowledge to be constituted by a decision not to enquire into an untargeted or speculative suspicion would be to allow negligence, albeit gross, to be the basis of a finding of privity””
.

THE EVIDENCE AND THE FACTS

[18]I was provided with a bundle of documents. This was supplied by HMRC. The appellant also provided me with a number of documents which he thought were relevant to his appeal. The appellant gave oral evidence on which he was cross examined. Officer Jonathan Beard (“Officer Beard”) gave evidence on behalf of HMRC. He tendered a witness statement on which he was cross examined by the appellant. From this evidence I make the following findings: (1). The appellant is of Turkish origin. He established the company which was incorporated in November 1989. The business of the company was as a tour operator, arranging tours predominantly to Turkey. The company was registered for VAT and returned and accounted for VAT on a quarterly basis. (2). The appellant was a director of the company from its incorporation until its liquidation in August 2016. (3). In a letter dated 30 October 2002 from the company to HMRC, the company stated that it was proposing to purchase the property and asked HMRC to accept the letter as an option to tax over the property. (4). On 31 October 2002, the company completed the purchase of the property for £650,000 plus VAT of £113,750. (5). On 7 November 2002, HMRC notified the company that the property was subject to an option to tax. (6). In its quarterly return for the period in which the purchase of the property took place, the company recovered the input tax which it incurred on that purchase. (7). On 3 April 2006 HMRC carried out a VAT assurance visit and confirmed that the input tax claimed on the purchase had been properly claimed. (8). Between 2009 and 2016, the company rented out surplus space at the property. It did not account for VAT on those rents. (9). At its zenith, in 2013, the company had a turnover of approximate £10 million and employed numerous staff. (10). In 2002 the company employed an accountant (“GS”). He retired shortly thereafter and recommended a successor Philip Gee (“PG”). The appellant’s unchallenged evidence was that these two gentlemen were acquainted, and that he had understood that GS had handed over all the paperwork relating to the company to PG. (11). The company employed a bookkeeper whose job was to compile a spreadsheet of all the inputs and outputs of the company during a VAT quarter from the purchase and sales invoices. The bookkeeper would then have a meeting with PG to discuss the VAT return and to go through the documents. The VAT return was then compiled by PG and submitted by his firm. All the appellant was told was the amount of VAT which the company had to pay in each quarter. (12). It was the appellant’s unchallenged evidence that the company had been told by PG that there was no need to account for VAT on the rents received from the letting of the surplus space at the property. (13). In 2015 and 2016 there was considerable civil unrest and terrorist activity in Turkey. This had a profound effect on the viability of the company’s business. Customers were asking for the return of money they had paid for holidays. The company could not pay hotels or airlines, so holidays were cancelled. The company’s business declined. Staff left. Turnover fell. (14). This caused considerable stress to the appellant. The company was coming under increasing financial pressure from the bank (to whom the company owed money, secured by a mortgage against the property) and other creditors. (15). To trade as a tour operator, the company needed a licence from the Civil Aviation Authority (“CAA”). This licence was associated with the property. It was the appellant’s unchallenged evidence that if the property had been repossessed by the bank, the licence would have been revoked and consequently the company would have been unable to trade. (16). Due to the financial state of the company, PG indicated that he no longer wished to work for the company. The company’s financial manager left, and the company was left with an inexperienced bookkeeper to deal with the VAT. (17). The company decided to market the property. It was the appellant’s evidence that he had no evidence that VAT had been recovered on the original sale, and that no VAT had been paid on rents. PG had not advised that VAT should be so payable. And so, when he marketed the property, he did so on the basis that VAT was not chargeable to a purchaser. (18). He knew that if the bank repossessed, he would get a worse deal than he would got if the company had sold the property. (19). The process of selling the property started in 2015 and was certainly underway in October 2015. By this time the company had secured a purchaser on the basis that no VAT would be charged on the sale. (20). On 12 October 2015, the appellant sent an email on behalf of the company to the option to tax unit of HMRC stating:
“I would like to learn following building VAT information, we bought in 2002, and we are on the selling process now, can you please inform us when the premises were originally opted for Tax? We do need to learn this information as soon as possible. Thank you for your cooperation”
. The property was identified as the subject of the email. (21). By that time, PG was involved in the sale process. This was because, apparently, he had been asked to assist by the company’s conveyancing lawyer (“AS”). (22). PG had had a telephone conversation with HMRC. It was the appellant’s evidence that he, too, had a telephone conversation with HMRC. Either one or the other or both (the evidence is not clear) had been told by HMRC that it would take them 50 days to clarify whether there was an option to tax over the property. I find as a fact that in October 2015, the appellant knew that it would take HMRC that time to provide a definitive view of whether the property was opted. (23). It was the appellant’s evidence that he could not wait that long. He was under considerable pressure from the bank. The buyer was approached to see whether it would pay VAT on the purchase, but the buyer said it could not recover any VAT it was charged and so was not prepared to pay VAT on the purchase. (24). An email from PG to the appellant dated 15 October 2015 records that: PG’s opinion was that it was probable that the company had opted to tax the property after its purchase in order to recover the VAT paid, and on that basis the company would be required to charge VAT on its sale; he had telephoned HMRC and asked if there was a valid option over the property but HMRC had said they would respond within 50 days; AS was correct in that a VAT liability was the responsibility of the company, but it could be visited on a director if he knowingly caused the company to not charge VAT; ignorance of the law is no defence; if the company sold the property for £825,000 without any VAT, then that figure is deemed to include VAT which would be owed by the company to HMRC. (25). This email was sent on to AS by the appellant on 16 October 2015 along with a covering email which said “after receiving this email from [PG] I think I have to charge VAT…”. It goes on to record that the appellant was looking to dig out further paperwork to see if he could find evidence of an option to tax having been made but thought it unlikely that such evidence would be forthcoming. He went on to say that he thought he had to charge VAT and that they should go back to the purchasers and inform them of “our position definitely to charge VAT”. This would enable the company to know whether the purchaser was intending to drop the sale or proceed, and whether they would be able to complete the purchase by the end of October. (26). An email from AS to the appellant dated 22 October 2015 records that: it was clear that the company had recovered VAT when it purchased the property but the basis of that recovery was not clear; the appellant had said that he had no recollection of any option to tax and had found nothing in the company files regarding the option to tax at the time of purchase; the appellant had no recollection of a VAT inspection; he had not been advised to charge VAT on the rents; after considerable discussions with PG and AS the appellant decided to continue with the sale without charging VAT on the sale price on the basis that there was no evidence of the option having been exercised and he had been advised not to charge VAT on the rents. (27). At or around that time there was a telephone conversation between the appellant, AS and PG. (28). The attendance note of that conversation compiled by AS reflects the contents of the email sent by her to the appellant on 22 October 2015. (29). The attendance note compiled by PG records that: the property was due to be sold within the next few days and it was not known whether an option to tax had been exercised following its purchase; it seems that input tax on the purchase had been reclaimed as evidenced by the accounts; VAT had not been charged on the rental income which could have been a mistake or it could have been because an option had not been made; a telephone call to HMRC had ascertained that it would take 40 days for a definitive response from the option to tax department; the appellant had searched the company records and had found no evidence of the option to tax; if the option to tax had been exercised, then VAT must be charged on the sale; if it had not been exercised input tax should not have been reclaimed on the purchase; it was entirely the appellant’s decision whether or not to charge VAT on the sale; PG’s understanding was that the appellant had made a decision not to charge VAT on the sale. (30). A letter dated 16 December 2015 from the option to tax unit of HMRC to the appellant at the company’s address (the property) which appears to have been sent by email, refers to the appellant’s letter to HMRC of 12 October 2015 and confirmed that HMRC’s documentation showed that an option to tax over the property was notified to HMRC, the effective date of that option being 30 October 2002. (31). It was the appellant’s evidence that that letter never came to his attention. The first time that he had seen it was when it was produced by HMRC for the purposes of the appeal. (32). Exchange of contracts and completion of the sale of the property took place on 12 January 2016. The sale price was £775,000. No VAT was charged to the purchaser. (33). The company did not file a VAT return accounting for VAT on the sale. HMRC’s letter to the appellant dated 7 February 2024 confirmed that the “…the Company’s 01/16 VAT Return was inaccurate as it did not include the VAT from the sale of the property…”. (34). The company went into liquidation on 24 August 2016. The largest creditor was HMRC. (35). The appellant’s evidence was that the liquidator had concluded that VAT should have been accounted for on the sale, and that the appellant, on behalf of the company, had paid the liquidator £70,000 towards this liability. It was his evidence, too, that the liquidator had told him that the total VAT liability was in the region of £140,000. (36). Officer Beard’s evidence was that the assessment raised on the company and sent to the liquidator on 31 July 2023 was for £144,696. On 19 September 2023, Officer Beard sent a penalty explanation letter to the liquidator assessing the company to a penalty of £43,408.80 under schedule 24 Finance Act 2007 on the basis that there had been an inaccuracy in a VAT return by dint of the company’s failure to declare VAT on rents received and on the sale of the property in respect of which there was an option to tax in place. This was based on unprompted disclosure with full reduction for the quality of disclosure. The penalty was then calculated as 30% of the potential lost revenue. (37). Following correspondence with the appellant and his agent and the correction of the spelling of the appellant’s name, Officer Beard issued the PLN to the appellant on 21 November 2023. It is in the amount of £38,749.73 which is 89.267% of the company penalty. This reflects the officer’s view that the PLN should relate only to the VAT liability on the sale of the property, and not to the VAT underdeclared on the rental income. (38). It was Officer Beard’s evidence that in an email from PG to AS on 8 October 2015, PG noted that “[the appellant] has advised us that he has this afternoon obtained confirmation by telephone from HM Revenue & Customs that VAT must be charged on the sale proceeds of [the property]”. (39). The officer refers to an exhibit to his witness statement which comprises that email, but the email itself was absent from the bundle which was provided to me. (40). Officer Beard took the view that the appellant had been told twice by HMRC, firstly by telephone on 8 October 2015 and subsequently by letter on 16 December 2015, that an option to tax was in place on the property. It was equally clear from the correspondence and other documentation that his professional advisers had advised him that he should charge VAT on the sale of the property. (41). He therefore took the view that the company penalty was based on the deliberate behaviour of an officer. The company was in liquidation. This justified the PLN. (42). The appellant’s evidence in chief was as follows. (43). He had relied on PG. PG had not told him to charge VAT on the rents. The appellant assumed that GS had passed all the documents relating to the company’s VAT position to PG. The fact, therefore, that PG did not know that there was definitely an option to tax the property meant that he too, was not certain of the position. (44). He had searched the company’s records and found no evidence that an option to tax had been made over the property. (45). As a director of the company, he had an obligation to safeguard the interests of the company and its shareholders. He also had an interest in safeguarding the position of the employees. In October 2015, the bank was threatening to repossess the property. This would be detrimental to the company as the bank would sell to recover its debt of £560,000 and would not be interested in anything over and above that. (46). He had negotiated a sale at £775,000. He was not clear whether there was a valid option to tax over the property. He had spoken to HMRC on the phone who had not been able to tell him and had told him that it would be 50 days before they could give him a written response. He had also written to HMRC on 12 October 2015 to clarify the position. (47). He had approached the purchaser to see whether it would be prepared to pay VAT over and above the purchase price but had been told that it would not (as it could not recover any VAT charged). (48). He therefore had two choices. Firstly, to withdraw from that sale and search for a new buyer. But there was no possibility then of finding a new buyer within the three week period that he had been given by the bank to sell the property, in default of which the bank would repossess. (49). Alternatively, he could continue with the sale at £775,000 which would free up £215,000 in cash which could be used to pay creditors and to trade out. If it subsequently transpired that VAT was payable on the sale, he would negotiate a time to pay arrangement with HMRC. In his words:
“when the letter comes which confirms that [the transaction] is subject to VAT, then I would have to do a call to HMRC saying can we do a deal and [arrange a] payment plan”. (50). He did not receive HMRC’s letter of 16 December 2015. It may have been sent to the office and indeed it may have arrived, but it had not been brought to his attention. Many staff were on holiday over the Christmas period. (51). Notwithstanding the sale, further civil unrest and terrorist attacks in Turkey meant that business continued to decline and so there was no alternative other than to put the company into liquidation. (52). He acted in good faith and did not benefit personally from the company’s failure to pay VAT. He had built up the business from scratch and both he and the members of his family were devastated that it was failing. In the Autumn of 2015, he was under extraordinary pressure to keep the business going and secure a profitable sale. To do this he needed to keep the CAA licence which could not have been achieved had the bank repossessed. He has managed to pay off his creditors. (53). In cross-examination, the appellant accepted that had he been able to find a buyer who would have been prepared to pay VAT on the purchase of the property, he would have sold to that buyer, even at a lower price, and would have charged VAT to that buyer and accounted for the VAT to HMRC. (54). He accepted that the decision to sell without charging VAT was a financial decision but that it was better to sell with the possible liability to pay £125,000 or so of VAT, than not to sell, in which case the company would have collapsed. However, this was a decision made in good faith in his capacity as a director of the company. (55). In answer to the question as to why, once he had sold the property, he didn’t contact HMRC, he replied “I couldn’t to be honest. I was under huge pressure of work. There were further terrorist attacks. I couldn’t follow-up things properly. I can’t remember whether I tried to contact HMRC”
. DISCUSSION Submissions[19]After the oral hearing in July 2025, I sought written submissions from the parties concerning the relevance of recklessness to the concept of deliberate behaviour. Both parties responded and the following summary of their respective submissions takes into account those written submissions.[20]In summary Mrs Nkonde submitted as follows: (1). The company (and the appellant) knew that there was an option to tax in place over the property. The company had applied for this option in October 2002 and received notification that it was in place in November 2002. (2). He had been told by HMRC, shortly before the sale of the property, that there was a valid option in place. Firstly, in a telephone conversation which was reflected in an email of 8 October 2015 which had been sent by the appellant’s accountant to CS stating that the appellant “has advised us that he has this afternoon obtained confirmation by telephone from [HMRC] that VAT must be charged on the sale proceeds of [the] property”. This was then reflected in an email from CS to the appellant on 9 October 2015 in which CS stated that VAT should be charged on the sale of the property. Secondly, in HMRC’s letter of 16 December 2015. (3). That letter is deemed to have been received by the company unless the contrary is proved. It is inconceivable it was not so received. (4). The appellant had been given professional advice by his conveyancing solicitor and his accountant that there was an option to tax in place. One reason for this was that the company had recovered input tax on the purchase of the property. (5). Notwithstanding that advice, the appellant proceeded with the sale of the property having made a conscious decision not to charge, nor to account to HMRC for VAT. Whilst the company was in financial difficulties, that does not override its statutory obligation to account for VAT on the sale. (6). HMRC have to establish that the appellant has been “guilty” of deliberate behaviour. The relevant principles are set out in Tooth and CPR. The appellant knew that the tax return was inaccurate as, at the time he submitted it, he knew that there was an option to tax over the property. Alternatively, he took a deliberate decision to shut his eyes to the true position, or refraining from making enquiries, so as to avoid discovering the true position. He therefore had blind eye knowledge of the inaccuracy. (7). The appellant is ambivalent about the reliance he placed on his professional advisers. On the one hand he claims that he was misled by PG on whom he relied for VAT advice. On the other the company had made and notified the option to tax, and the appellant had asked for confirmation regarding that option in his letter to HMRC of 12 October 2015. (8). He had been told that ignorance of the law was no excuse. (9). His evidence was that if he could have found a buyer who would have paid VAT, he would have sold to that buyer. This reflects a conscious decision not to charge or pay VAT. (10). He also said that if it became apparent, once the sale had concluded, that VAT should have been charged, he would negotiate with HMRC to pay that VAT. This again reflects a conscious decision not to charge or pay VAT on the sale. (11). The necessary conditions for the imposition of the PLN have been made out.[21]In summary Mr Kog submitted as follows: (1). He did not know that there was an option to tax over the property at the time of its sale. Nor did his professional advisers. They advised him of the consequences that would arise if there had been a valid option in place. But they did not know, either way, whether there was or not. (2). At the time of the sale, he was not aware of the option which had been made by the company in 2002, nor of the confirmation that it was in place which had been supplied by HMRC in November 2002. (3). The company has always taken, and relied on, professional advice. He relied on GS and PG. He had assumed that the former would have provided all the relevant VAT information to the latter. And so, if GS was aware that there was an option in place, he would have passed the paperwork to PG who would also have been aware of the position. The fact that PG did not advise that VAT should be paid on the rents was clear evidence that the property was not opted. (4). He did not, personally, receive the letter from HMRC of 16 December 2015. He accepted that it may have been delivered to the office, but it did not come to his attention. This may be because it was not delivered due to the vagaries of the postal service during the Christmas period. Or it may have been because they were short staffed during this period. But either way he did not see it at that time. (5). As a director of the company, he had to act in its best interests. He did. The bank wanted to repossess the property which would have caused the business to fail. He could not afford to lose the purchaser who had said that they could not recover VAT and so would not pay it on the price for the property. He did not know definitely that VAT was chargeable. He therefore took the commercial decision to sell the property without charging VAT. Had VAT subsequently been shown to be payable, he would have done a deal with HMRC. As things turned out, he had no opportunity to do that deal because the business failed and the company went into liquidation. (6). He was under an extraordinary degree of pressure in 2014/2015 due to the issues in Turkey which were having a disastrous impact on his business. He was not functioning normally. His priority was to save the business. HMRC was not a definite creditor as at the time of the sale, they had not notified him that there was an option to tax in place. He therefore had to give priority to other creditors. (7). The company has always paid its taxes as and when they fell due. The company has paid off its creditors. He has paid a large proportion of the outstanding VAT due by the company, to the liquidator. He accepts that VAT is due but does not accept that his behaviour was deliberate. (8). He had always acted in good faith, and he has obtained no personal benefit from the failure by the company to pay VAT. He never intended to mislead HMRC. (9). He acted neither recklessly nor deliberately. He relied on professional advice. He actively sought clarification when the issue arose. He sought to clarify HMRC’s position but was never told what that was. He acted under severe commercial pressure with a genuine intention of preserving the company’s ability to trade.

My view

[22]The burden of establishing that the appellant has acted deliberately rests with HMRC. The standard of proof is the balance of probability.[23]The test for deliberate behaviour, set out in Tooth and confirmed in CF Booth Ltd v HMRC [2022] UKUT 217 is straightforward. HMRC need to show an intention to mislead HMRC on the part of the appellant as to the truth of the relevant statement. This essentially means that in this case they must show that the appellant has knowingly provided HMRC with a document (his VAT return for the period 01/16) which contained an error (the failure to account for VAT on the sale of the property) with the intention that HMRC should rely upon it as an accurate document.[24]I therefore need to consider the appellant’s state of knowledge regarding the option to tax at the time at which that VAT return was submitted to HMRC.[25]I have approached this in two stages. Firstly, is there persuasive direct evidence that Mr Kog knew that there was a valid option to tax over the property at the time that he submitted the return.[26]If not, then on the evidence, could it be inferred that Mr Kog knew of that option to tax at that time. And when considering that inference, I adopt the test set out by Arden LJ in Barlow Clowes International Ltd v Henwood [2008] EWCA Civ 577, in which she said at [68]: “… The ultimate fact in issue was Mr Henwood’s intention. This had to be a matter of inference from all the relevant facts, giving such weight to Mr Henwood’s declarations as to his own intention as the law allows. An inference of this kind must be drawn on the balance of probabilities, and thus the judge had to be satisfied that the inference that he drew as to Mr Henwood’s intention was more likely than not on all the relevant and proved facts”.[27]CPR is authority that where a taxpayer suspects that a document contains an inaccuracy but deliberately and without good reason chooses not to confirm the true position before submitting the document to HMRC, then the inaccuracy is deliberate on the part of the taxpayer (blind eye knowledge).

Direct evidence

[28]HMRC say that there are four strands of direct evidence. Firstly, that the appellant had been told, orally, by HMRC, in October 2015, there was a valid option to tax. Secondly, he had been told the same by his accountant and CS. Thirdly, on 30 October 2002 he had notified HMRC of an option to tax over the property which had been confirmed to him on 7 November 2002. Finally, he had been told by HMRC in a letter dated 16 December 2015 there was a valid option to tax over the property.[29]Taking these in turn.[30]HMRC submit that there is direct evidence that the appellant had been told by HMRC in October 2015, over the telephone, that there was a valid option to tax over the property. This is reflected in the email sent by the appellant’s accountant to CS which ostensibly records that the appellant had been told by HMRC that there was a valid option to tax over the property.[31]However, the email of 8 October 2015 in which this is purportedly recorded was not in the bundle. The document, which was ostensibly this email, was in fact a second copy of the appellant’s email to HMRC’s option to tax unit dated 12 October 2015 querying whether the property was subject to an option to tax. Nor was a copy of the email of 9 October 2015 in the bundle.[32]Without this primary evidence I attach no probative value to this submission. And indeed, it seems to me to be contradicted by the fact that in the accountant’s email of 15 October 2015, it is clear that HMRC was not prepared to say to the accountant whether the property had been opted. And if Mr Kog had indeed been told on 8 October that the property was opted, why did he write to the option to tax unit four days later.[33]So, the emails of 8 and 9 October 2015, if indeed they exist, cannot provide direct evidence that the appellant had been told by HMRC that there was a valid option to tax over the property.[34]Secondly, HMRC submit that the appellant had been told by his professional advisers that there was a valid option to tax over the property, as evidenced by the accountant’s email of 15 October 2021 and the associated attendance note. But this is not what those documents show. The email of 15 October from the accountant to the appellant says that “I telephoned HMRC on your behalf to enquire whether the property had been opted for VAT… HMRC would not answer my question on the telephone… They have promised to [respond] within 50 days”.[35]And in the email sent by that accountant to confirm a meeting between him and the appellant during which “we also spoke by telephone with your [CS]”, the accountant records that “it is not known whether the “option to tax” in respect of VAT implications was exercised following the purchase of the property in 2002”.[36]From this it is clear to me that the appellant was not told at this time, unequivocally, by either his professional advisers, or by HMRC, that there was a valid option to tax in place over the property.[37]I entirely accept that he was given advice that there was a likelihood that an option to tax was in place on the basis that input VAT had been claimed when the property was first purchased. But this is then gainsaid in the same document which contains that advice when it is observed that no VAT was paid on the rental income, which could have been a result of an error, or of the fact that no option was made in the first place.[38]And I also accept there is evidence reflecting the appellant’s view that in light of the uncertainty, he should charge VAT on the sale. But I see this as a matter of commercial expediency rather than an actual knowledge that there was a valid option in place.[39]He was receiving ambiguous advice regarding the technical position of the option and the commercial consequences of not charging VAT on the sale.[40]And so, perfectly understandably, he asked the option to tax unit for clarification as to the position by way of his email of 12 October 2015.[41]HMRC’s third piece of evidence, that the appellant knew of the option to tax is the original notification to HMRC by the company dated 30 October 2002, notifying HMRC of that option, and notification on 7 November 2002 by HMRC that the property was validly opted.[42]The appellant accepted that he had submitted that notification, but his evidence was that he had forgotten all about it, and having searched his records, he could find no evidence of the notification. He had put his tax matters in the hands of his then accountants, who had not advised him to charge VAT on the rent, and so it was reasonable for him to assume that there was no valid option to tax over the property.[43]I accept this. The appellant was in the same position regarding his state of actual knowledge as he was in October 2015. I cannot find that he actually knew that there was a valid option in place given the fact that these accountants, upon whom was relying to provide tax advice, had not suggested that he should be paying VAT on rents and recharging that to his tenants.[44]It is true that he had recovered input VAT when the company purchased the property, something which is consistent with having opted to tax. But this position was then blurred by the ongoing advice that there was no need to charge VAT on the rents. This position was then reflected in the accountant’s emails in October 2015.[45]So I do not consider that the appellant had direct knowledge of the option in January 2016 as a result of the original notification of the option in 2002.[46]HMRC’s final piece of direct evidence is that the appellant had been told that there was a valid option to tax in a letter dated 16 December 2015 from HMRC.[47]If the appellant had received this letter, then he would have nowhere to go. However, his evidence was that he did not so receive it. He accepts that it might have been received at his office, but it was received during the Christmas period and was not brought to his attention.[48]HMRC do not believe this. In their view (rightly) there is sufficient evidence to show that the letter was properly addressed, prepaid, and sent, and the appellant has not discharged the burden of showing that he did not receive it. Simply saying that he did not, is not good enough.[49]To establish that the appellant had direct knowledge of the option, HMRC must show that the appellant had actually received the letter. If it had been received in his office but not drawn to his attention, then the appellant can justifiably say that he did not actually know of the option to tax.[50]It is, of course, entirely to his advantage for the appellant to deny receipt of this letter. He had already been advised that there was a chance that an option to tax was in place over the property. He was desperately trying to save his business which required a sale of that property. The purchaser he had lined up could not recover VAT and thus was not prepared to pay VAT on its purchase. If the property was opted, the appropriate VAT fraction would therefore have to be paid away to HMRC leaving less money for the appellant to fund the ongoing business having paid off the bank. It would have been extremely inconvenient had he learnt, in December 2015, that there was an option in place. There was no chance of renegotiating with the purchaser, nor was there any practical likelihood of finding a new purchaser who would be prepared to pay VAT, in the time scale required by the bank.[51]But notwithstanding these matters, I believe the appellant when he says that he did not receive the letter. He struck me as reliable on this point.[52]He had clearly considered the VAT implications of the sale, and investigated both the technical position regarding the option, and the commercial consequences of it having been made or otherwise. This demonstrates to me that he was a taxpayer who was engaging with the tax system and wanted to know where he stood. This, too, was reflected in his request for clarification made to HMRC’s option to tax unit on 12 October 2015. He was not keeping his head down at that stage; he wanted to know what the position was.[53]It is my view that had he received the letter of 16 December 2015, and so had direct knowledge at that time that an option to tax was in place over the property, then notwithstanding it would have put him in a worse financial position, he would have dealt with it then and recorded a liability to pay VAT on the 01/16 VAT return.[54]So I conclude that there is insufficient direct persuasive evidence that the appellant knew that there was an option to tax in place over the property at the time that he submitted the 01/16 return.

Can knowledge be inferred

[55]I therefore turn to the second strand of the analysis. Have HMRC demonstrated that there is sufficient evidence from which I can infer that the appellant knew the option at the time that he submitted that return?[56]I have concluded that there is sufficient evidence from which I can draw the inference that the appellant had blind eye knowledge of the option to tax when he submitted that return.[57]I have come to that conclusion for the following reasons.[58]I have considered the appellant’s circumstances as they existed firstly at the date of the sale of the property on 12 January 2016 (“the sale date”), and then again when the 01/16 tax return was due to be filed at the beginning of March 2016 (“the filing date”).[59]It is clear from the evidence that the position regarding the option to tax was a matter of considerable concern to the appellant. And commendably he sought to clarify the position by obtaining clarification from HMRC’s option to tax.[60]The situation at the sale date was as follows: (1). He had no direct knowledge that an option to tax had been made over the property. (2). He had, however, been advised by his professional advisers that such an option was a serious possibility by dint of the fact that he had recovered VAT on the original purchase (the accountant’s email of 15 October 2015). (3). That email also recorded the fact that failure to charge VAT on the rent might have been a mistake. (4). He had taken the view, in light of that email, that “I think I have to charge VAT”, and that they should go back to their potential purchaser and “inform them [of] our position defiantly (sic) to charge VAT”. (5). Either he or his accountant had been told that HMRC would respond to their oral requests (made by one, other or both of them) to clarify the position regarding the option within 50 days. That 50 day period started around 15 October 2015. (6). He had made a formal request for clarification regarding the option to tax to HMRC’s option to tax unit on 12 October 2015. (7). He had been told that the purchaser was not prepared to pay VAT and accordingly, if an option to tax had been made, the VAT fraction would have to be paid to HMRC. (8). He was desperately trying to save his business and had been given a short timetable by the bank to sell the property. It would not have been possible to negotiate a sale to another purchaser. (9). He therefore made a conscious decision to sell to his agreed purchaser on the basis that no VAT was chargeable, but that if VAT was chargeable because a valid option had been made, he would negotiate with HMRC regarding payment of the VAT.[61]These circumstances clearly demonstrate that the VAT issue associated with the sale of the property was something which the appellant, highly commendably, wanted to clarify. It had a significant impact on the amount of the sale proceeds that he could retain and use to pay firstly the bank and then his creditors. He sought advice from his professional advisers. He sought clarification from HMRC. He had decided on a strategy that, given the nature of the purchaser, he would sell on the basis that no VAT was payable and would then negotiate with HMRC should it turn out that an option had indeed been made.[62]Given this, my view is that the appellant should have taken a great deal more interest in the response to his request for clarification from HMRC, than it seems that he did. The 50 days within which HMRC had said they would respond, would have expired at the beginning of December 2015. So, notwithstanding Christmas, he had several weeks before the sale date to do this. Given the importance of the VAT situation, it was incumbent on Mr Kog to chase HMRC once that (albeit soft) deadline had expired. Having based his VAT strategy on the outcome of this clarification, he should have been a great deal more diligent about clarifying the position once that period expired. He could have done this at any time from mid-December until the sale date. But it seems that he did not.[63]He could also have done it after the sale date but before the filing date. After the sale date he had about seven weeks before he needed to file the relevant VAT return. He could (and should) have taken action either by way of asking HMRC direct, or by asking his professional advisers to do so, as to the then current situation of the clarification that he was seeking. He could have telephoned HMRC as he had done in October 2015. He could have sent a further letter. Both might have driven out the fact that the letter of 16 December 2015 had been sent to him, and a further copy sent either to him or his professional advisers, perhaps electronically to avoid the vagaries of the postal system, which would have given him the information which he sought.[64]There is no evidence that any stage after October 2015, the appellant did anything which might have provided him with greater certainty about the position regarding the option to tax. To my mind, given its importance to him, this is a telling failure.[65]He was asked in cross-examination as to why, once he had sold the property, he didn’t contact HMRC, he replied “I couldn’t to be honest. I was under huge pressure of work. There were further terrorist attacks. I couldn’t follow-up things properly. I can’t remember whether I tried to contact HMRC”.[66]I do not accept that he tried to contact HMRC. Nor do I accept that this is a good reason for not following up the clarification which was so important to him. It seems to me a convenient excuse rather than a good reason. By the time of the filing date, the bank had taken its cut and he was sitting on the rest of the sale proceeds and was using it to pay off his creditors and secure the future of his business. Whilst that is a laudable motive, it also means that he had a vested interest in keeping his head down as far as knowing about the VAT position. Whilst I have accepted his evidence regarding the non-receipt of the letter of 16 December 2015 notwithstanding that he has a clear motive for that denial, I do not accept that the reason for his failure to contact HMRC to seek clarification regarding the option was that he simply couldn’t follow things up properly. As I say, it is clear that HMRC’s clarification was very important to him given the importance which he had attached to the VAT status of the property, and his evidence that if it turned out that the property was opted, he would negotiate payment with HMRC. He could obviously not do this until he heard from HMRC.[67]I consider that his failure to clarify the position with HMRC constitutes blind eye knowledge.[68]As per CPR; “In summary, blind-eye knowledge requires, in my opinion, a suspicion that the relevant facts do exist and a deliberate decision to avoid confirming that they exist… The deliberate decision must be a decision to avoid obtaining confirmation of facts in whose existence the individual has good reason to believe…”.[69]From the facts and circumstances that I have recorded above, and the position in which the appellant found himself on the sale date and the filing date, it is my view that the appellant had a suspicion that HMRC would confirm that the property was opted, and yet took a deliberate decision not to follow up the letter that he had written seeking confirmation of that fact. This amounts to blind eye knowledge.[70]He had been advised by his professional advisers that there was a real possibility that the property was opted. He himself had accepted at one stage that he needed to charge VAT on the property. Once he realised the buyer would not pay VAT, he changed his stance. However, he adopted a strategy that should his stance be wrong, and that VAT was payable to HMRC, he would negotiate payment terms with HMRC. He sought clarification from HMRC These all demonstrate that he had good reason to believe that his stance might have been wrong and that HMRC might come back and say that the property was opted. It is my view that by the filing date, this was not something that the appellant wanted to hear. And so, he kept his head down.[71]Whilst there may have been other matters which had an impact on following up the position, I infer that he had the relevant suspicion that the fact existed (the property was opted) and took a deliberate decision not to obtain confirmation by approaching HMRC after the 50 day deadline was up.[72]I therefore find that the appellant knew, on the filing date, that his VAT return was inaccurate and thus is “guilty” of filing a deliberately inaccurate return.

CONCLUSION

[73]I have found that the PLN has been properly calculated and served on the appellant. Indeed, the appellant does not dispute this. I have found that the appellant did not have direct actual knowledge at the filing date that there was a valid option to tax over the property. However, I have found that the appellant had blind eye knowledge of that fact at that date. This means that HMRC have established that the appellant knew, when he filed his 01/16 VAT return, that the property was opted and that he needed to account for output VAT on the sale. He did not. Instead, he filed on the basis that there was no option and so no liability to pay output VAT. This inaccuracy is a deliberate inaccuracy as he intended to mislead HMRC as to the truth of the position.

DECISION

[74]I therefore dismiss the appeal.

RIGHT TO APPLY FOR PERMISSION TO APPEAL

[75]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. Release date: 08th JANUARY 2026