Extended 20-Year Time Limit for Deliberate Behavior in VAT Assessments: Leach v. Revenue & Customs (2019) Commentary: First-tier Tribunal (Tax)

Introduction

The case of Leach v. Revenue & Customs (VAT - assessment to reclaim overpaid input tax) ([2019] UKFTT 352 (TC)) was adjudicated by the First-Tier Tribunal (Tax) on June 3, 2019. The appellant, Anthony Leach, contested an assessment by Her Majesty's Revenue and Customs (HMRC) seeking to recover overpaid Value Added Tax (VAT) amounting to £49,857 for the period from May 2011 to November 2014, in addition to a penalty of £47,364.15. The crux of the dispute revolved around whether Mr. Leach's behavior in submitting VAT returns was "deliberate and concealed," which would justify the extension of the assessment time limit to 20 years under the Value Added Taxes Act 1994 (VATA) Section 77.

Summary of the Judgment

The First-Tier Tribunal upheld HMRC's assessment and penalty, determining that Mr. Leach's actions constituted deliberate and concealed behavior. Despite Mr. Leach's non-attendance at the hearing, the Tribunal proceeded based on the extensive documentation provided by HMRC. The key findings included:

Mr. Leach destroyed relevant documents supporting his VAT claims, hindering HMRC's ability to verify the accuracy of his input tax recoveries.
The Tribunal adopted the Court of Appeal's analysis from HMRC v Tooth (2019) EWCA Civ 826 to interpret "deliberate" within VATA Section 77.
The penalty under Finance Act 2007, Schedule 24, for deliberate and concealed behavior was deemed appropriate, with a 5% reduction for partial disclosure.
The extended 20-year time limit for assessment was justified due to Mr. Leach's deliberate actions.

Consequently, both the VAT overpayment assessment and the associated penalty were upheld in full.

Analysis

Precedents Cited

The judgment extensively referenced prior cases to elucidate the interpretation of "deliberate" behavior in tax assessments:

HMRC v Tooth ([2019] EWCA Civ 826): Explored the meaning of "deliberate" within the Taxes Management Act 1970 (TMA), particularly focusing on deliberate inaccuracies in tax documents.
Van Boeckel v C&E Commrs ([1981] STC 290): Emphasized the necessity for HMRC to make honest and genuine value judgments without overestimation.
Rahman (t/a Khayam Restaurant) v C&E Commrs ([1998] STC 826): Established that assessments should not be invalidated merely due to disagreements over judgment application unless findings are arbitary or irrational.
Auxilium Project Management v HMRC ([2016] UKFTT 249 (TC)): Defined "deliberate inaccuracy" as knowingly providing incorrect documents to HMRC with the intent for them to be relied upon.

Additionally, recent Upper Tribunal cases like Barry Edwards v HMRC and Advanced Scaffolding v HMRC were considered, especially regarding the application of "special circumstances" in penalty reductions.

Legal Reasoning

The Tribunal's legal reasoning hinged on interpreting statutory provisions and applying precedents to ascertain Mr. Leach's intent and behavior:

Interpretation of "Deliberate" under VATA Section 77: Drawing from the Court of Appeal's dicta in Tooth, the Tribunal extended the analysis to VATA Section 77(4B), determining that "deliberate" encompasses knowingly submitting inaccurate VAT returns, irrespective of the intent to mislead.
Extended Time Limit Justification: Under VATA Section 77(4A), an assessment can be made within 20 years if the loss of VAT was brought about deliberately. The Tribunal inferred that Mr. Leach's destruction of documents served to conceal the inaccuracies, warranting the extended time limit.
Penalty Assessment under Finance Act 2007, Schedule 24: The Tribunal concluded that Mr. Leach's behavior met the threshold for "deliberate and concealed" actions, justifying the imposition of a 100% penalty on the potential lost revenue. A 5% reduction was applied for partial disclosure.
Proceeding in Absence: Despite Mr. Leach's non-attendance, the Tribunal found sufficient evidence to proceed, aligning with Tribunal rules aimed at justice and efficiency.

Impact

The judgment in Leach v. Revenue & Customs has significant implications for VAT assessments and tax compliance:

Clarification of "Deliberate" in VAT Legislation: By adopting the Court of Appeal's analysis from Tooth, the Tribunal provides a clearer framework for determining deliberate behavior in VAT submissions, emphasizing the role of document accuracy and the consequences of destroying supporting records.
Extended Time Limits Enforcement: The affirmation of the 20-year time limit under VATA Section 77(4A) for deliberate cases underscores HMRC's capability to reassess VAT returns long after the standard four-year period, deterring taxpayers from negligent or intentional inaccuracies.
Penalty Regime Rigidity and Fairness: The decision reinforces the strict penalty structures for deliberate misconduct, ensuring that penalties remain deterrents. However, it also highlights the importance of partial disclosures in mitigating penalties.
Tribunal's Procedural Flexibility: The Tribunal's willingness to proceed in the appellant's absence, based on the evidence, emphasizes the importance of timely cooperation and the potential consequences of non-attendance.

Overall, the judgment strengthens the enforcement mechanisms against deliberate VAT overclaims and provides a precedent for interpreting similar cases in the future.

Complex Concepts Simplified

Value Added Taxes Act 1994 (VATA) Section 77

VATA Section 77 outlines the time limits within which HMRC can assess VAT. Typically, assessments must be made within four years of the end of the relevant accounting period. However, this period can be extended to 20 years if certain conditions are met, such as deliberate behavior by the taxpayer that results in VAT loss.

Finance Act 2007, Schedule 24 (Sch 24)

Sch 24 pertains to penalties for inaccuracies in tax documents, including VAT returns. Penalties can be imposed if inaccuracies are deemed "careless" or "deliberate." Deliberate inaccuracies, especially when concealed, attract higher penalties. The schedule outlines provisions for penalty reductions based on the taxpayer's cooperation and disclosure.

Penalty Reduction Mechanism

Penalties under Sch 24 can be reduced based on certain factors, such as:

Disclosure: Informing HMRC of the inaccuracy proactively.
Assistance: Providing reasonable help in quantifying the inaccuracy.
Access: Allowing HMRC access to records to ensure accurate assessment.

The statutory maximum reduction is 50%, ensuring that penalties remain significant deterrents even with partial cooperation.

Conclusion

The Leach v. Revenue & Customs judgment marks a pivotal development in the interpretation of VAT assessment provisions and penalty structures within UK tax law. By aligning the meaning of "deliberate" with the Court of Appeal's interpretation in Tooth, the Tribunal fortified the criteria for extended assessment periods and stringent penalties. This decision serves as a stern reminder to taxpayers about the importance of accurate and honest VAT submissions and the severe repercussions of deliberate non-compliance, including extended assessment periods and substantial financial penalties. Additionally, the case underscores the Tribunal's role in ensuring procedural justice, even in the absence of the appellant, provided sufficient evidence substantiates the claims. Moving forward, taxpayers and practitioners must navigate VAT reporting with heightened diligence, recognizing the enduring capacities of HMRC to reassess and penalize deliberate inaccuracies.

Extended 20-Year Time Limit for Deliberate Behavior in VAT Assessments: Leach v. Revenue & Customs (2019) Commentary