Deliberate Action in VAT Penalties: Contractors 4 U Ltd and Asset Services North West Ltd v. Revenue and Customs

Introduction

The case of Contractors 4 U Ltd and Asset Services North West Ltd v. Revenue and Customs ([2016] UKFTT 17 (TC)) involves both appellants challenging penalties imposed for issuing invoices that incorrectly included VAT before they were officially registered for VAT. The key issues revolve around whether the invoicing actions were deliberate and if there existed a reasonable excuse based on the appellants' understanding of advice allegedly received from HM Revenue and Customs (HMRC).

Summary of the Judgment

The First-tier Tribunal (Tax Chamber) dismissed the appeals brought by Contractors 4 U Ltd and Asset Services North West Ltd against penalties issued under paragraph 2 of Schedule 41 of the Finance Act 2008. The tribunal concluded that the appellants deliberately issued unauthorized VAT invoices, despite believing they had received provisional guidance from HMRC. Consequently, the penalties imposed for the unauthorized issuance of VAT invoices were upheld.

Analysis

Precedents Cited

The judgment references Noor [2013] UKUT 71 (TCC), which established that the tribunal does not have jurisdiction over appeals based on misdirection or legitimate expectation. This precedent guided the tribunal to focus solely on whether the appellants had acted deliberately or had a reasonable excuse, excluding claims of misdirection by HMRC.

Legal Reasoning

The tribunal analyzed the applicancy of Schedule 41 of the Finance Act 2008, specifically focusing on the unauthorized issuance of VAT invoices. Under paragraph 2 of Schedule 41, a penalty is imposed if an unauthorised person issues an invoice showing VAT. The key consideration was whether the appellants' actions were deliberate.

The court defined "deliberate" as actions taken consciously with an appreciation of the choice involved. Despite the appellants' claims of misunderstanding HMRC's advice, the tribunal found that over several months, the consistent failure to follow the purported guidance constituted deliberate action. The discrepancy between the appellants' understanding and their actual invoicing practices supported this conclusion.

Furthermore, even if the actions were not deliberate, the tribunal determined that there was no reasonable excuse. The appellants' belief in the advice received did not align with HMRC's records, and the lack of tangible evidence supporting their understanding undermined any claim of a reasonable excuse.

Impact

This judgment reinforces the strict liability nature of penalties under Schedule 41 of the Finance Act 2008 regarding VAT invoicing. It underscores that businesses must ensure compliance with VAT regulations and that reliance on inferred or undocumented advice from HMRC does not constitute a reasonable excuse. Future cases will likely reference this judgment when assessing the deliberate nature of unauthorized VAT practices, emphasizing the importance of clear and documented guidance from HMRC.

Complex Concepts Simplified

Schedule 41 Finance Act 2008: A section of UK tax law that outlines penalties for unauthorized VAT practices, including issuing VAT invoices without proper registration.

Unauthorized Issue of VAT Invoice: Issuing an invoice that includes VAT charges when the issuer is not registered for VAT.

Deliberate Action: Actions taken knowingly and intentionally, with an understanding of the choices involved.

Reasonable Excuse: A valid justification for failing to comply with tax obligations, which exempts the taxpayer from penalties.

Strict Liability: A legal doctrine where responsibility for oversight or infractions does not depend on actual negligence or intent.

Conclusion

The Tribunal's decision in Contractors 4 U Ltd and Asset Services North West Ltd v. Revenue and Customs serves as a critical reminder of the stringent compliance required under VAT regulations. By dismissing the appellants' claims of reasonable excuse and affirming the deliberate nature of their unauthorized VAT invoicing, the judgment underscores the necessity for businesses to meticulously adhere to HMRC guidelines and maintain accurate records. This case sets a precedent that will influence how similar VAT penalty cases are adjudicated, emphasizing that reliance on misunderstood or undocumented advice is insufficient to mitigate penalties.