Introduction

The case of Clynes v. Revenue and Customs ([2016] UKFTT 369 (TC)) revolves around the appellant, Mr. Anthony Clynes, who sought to appeal against a penalty imposed by HM Revenue and Customs (HMRC) for deliberate inaccuracies in his company’s VAT returns. The core issues pertained to the eligibility and misuse of the Flat Rate Scheme (FRS) under Schedule 24 of the Finance Act 2007, and the subsequent liabilities imposed on Mr. Clynes as a director of 247 Security Services (UK) Ltd.

Summary of the Judgment

The First-tier Tribunal (Tax Chamber) dismissed Mr. Clynes’s appeal against HMRC’s decision to impose a penalty of £65,660.39 for deliberate inaccuracies in VAT reporting. The tribunal upheld HMRC’s assertion that Mr. Clynes, as the director, was responsible for the deliberate misreporting of VAT by improperly enrolling the company in the FRS despite exceeding the turnover thresholds. Additionally, Mr. Clynes failed to account for all taxable supplies accurately, leading to significant underpayment of VAT. The tribunal found that the inaccuracies were deliberate, thus fully attributing the penalty to Mr. Clynes without further reductions.

Analysis

Precedents Cited

While the judgment did not explicitly cite prior cases, it referenced the legislative framework established by the Finance Act 2007, particularly Schedule 24, which standardizes penalty provisions across various taxes. The tribunal emphasized interpreting the term "deliberate" based on statutory meaning rather than previous case interpretations of "dishonesty." This approach aligns with principles of statutory interpretation, prioritizing the natural and contextual meaning of terms within new legislative provisions.

Legal Reasoning

The tribunal applied a purposive interpretation of Schedule 24, focusing on the definitions and context within the legislation. Key points in their reasoning included:

• Deliberate Inaccuracy: Determined that deliberate inaccuracies require conscious, intentional actions or a conscious choice to ignore required steps, especially by someone with relevant qualifications.
• Director’s Responsibility: Affirmed that as a director responsible for financial affairs, Mr. Clynes owed a duty of care and was expected to possess knowledge of VAT regulations.
• Prompted Disclosure: Acknowledged that the Company made a prompted disclosure, which influenced the calculation of the penalty.
• Penalty Attribution: Concluded that 100% of the penalty was rightfully attributable to Mr. Clynes based on his direct involvement and control over the VAT inaccuracies.

The tribunal scrutinized Mr. Clynes’s claims of unintentional errors, considering his qualifications and professional obligations. They found his explanations lacking credibility, particularly given his role as a director and his responsibility to ensure accurate VAT reporting.

Impact

This judgment reinforces the accountability of company directors for accurate VAT reporting and adherence to HMRC regulations. It underscores the expectation that directors, especially those with financial qualifications, must exercise due diligence in their tax affairs. The decision serves as a precedent for HMRC’s stance on attributing penalties to directors for deliberate inaccuracies, thereby emphasizing the importance of compliance and accurate financial reporting.

Complex Concepts Simplified

Flat Rate Scheme (FRS)

The FRS is a VAT accounting scheme designed for small businesses, allowing them to pay a fixed percentage of their turnover as VAT, simplifying calculations. However, eligibility requires the business’s taxable turnover to be below set thresholds (£150,000 annually at the time of the case).

Schedule 24 of the Finance Act 2007

This schedule outlines the penalty regime for inaccuracies in tax returns, categorizing penalties based on the nature of the inaccuracy (careless or deliberate) and the taxpayer’s actions regarding disclosure and cooperation.

Deliberate Inaccuracy

An intentional or conscious action leading to incorrect tax reporting. In this context, it implies that the person knew or ought to have known that their actions would result in inaccuracies.

Prompted Disclosure

A disclosure is considered prompted if the taxpayer admits the inaccuracy after being prompted by HMRC, rather than proactively revealing it without any indication that HMRC was aware or about to discover it.

Conclusion

The ruling in Clynes v. HMRC serves as a significant affirmation of HMRC’s authority to hold directors personally liable for deliberate inaccuracies in VAT reporting under Schedule 24. It highlights the stringent expectations placed upon company directors to ensure compliance with tax laws, especially when they possess relevant qualifications. The decision emphasizes that ignorance or unintentional errors are insufficient defenses against penalties where deliberate inaccuracy can be demonstrated. Moving forward, directors must exercise enhanced diligence in their tax affairs to avoid personal liabilities and ensure their companies adhere to all relevant VAT regulations.