Kinesis Positive Recruitment Ltd v. Revenue and Customs: Establishing the Framework for Deliberate Unauthorized VAT Invoicing

Introduction

The case of Kinesis Positive Recruitment Ltd v. Revenue and Customs ([2016] UKFTT 178 (TC)) addresses significant issues surrounding Value Added Tax (VAT) compliance, particularly the unauthorized issuance of invoices displaying VAT after a company's VAT registration has been canceled. The appellant, Kinesis Positive Recruitment Ltd (hereinafter referred to as "the Company"), appealed against a penalty imposed by HM Revenue & Customs (HMRC) under paragraph 2 of Schedule 41 of the Finance Act 2008 (FA 2008).

The central issues revolved around whether the Company's issuance of VAT-inclusive invoices was deliberate, the applicability of penalties, and the appropriate interpretation of relevant statutory provisions. The case was heard by the First-tier Tribunal (Tax) on March 9, 2016, with the decision ultimately dismissing the Company's appeal.

Summary of the Judgment

The Tribunal upheld the penalty imposed on the Company for unauthorized issuance of VAT invoices between March 2011 and July 2013. The key findings included:

The Company was aware that its VAT registration was canceled in March 2009.
Issuing invoices containing VAT without authorization was deemed deliberate.
The penalty was calculated at 35% of the potential lost revenue, considering the Company's high level of cooperation but absence of any 'special circumstances' to warrant further reduction.
The appeal was dismissed, affirming HMRC's decision.

Analysis

Precedents Cited

The judgment references Contractors 4 U Ltd v HMRC ([2016] UKFTT 17 (TC)), a similar case where the issue of deliberate unauthorized VAT invoicing was examined. In that case, the Tribunal clarified that the term "wrongdoing" in Schedule 41 does not necessitate malicious intent but rather refers to the incorrectness of the action.

This precedent was pivotal in shaping the Tribunal's interpretation of what constitutes deliberate behavior under Schedule 41, emphasizing that awareness of the unauthorized nature of the invoices suffices for deliberateness, irrespective of intent to deceive or gain advantage.

Legal Reasoning

The Tribunal meticulously dissected the statutory provisions of Schedule 41 of the Finance Act 2008, focusing on the definitions and criteria for penalties related to unauthorized VAT invoicing. Key aspects of the Tribunal's legal reasoning include:

Deliberateness: The Tribunal concluded that for an act to be deliberate under paragraph 5 of Schedule 41, it is sufficient that the taxpayer knowingly issues an unauthorized invoice showing VAT. The definition does not require an intent to avoid tax but necessitates awareness of the unauthorized nature of the action.
Knowledge of Unauthorized Status: The Tribunal found that the Company, through its director Mr. Gibbons and its agent Brooks City, was aware that its VAT registration was canceled and that issuing VAT invoices was unauthorized.
Punitive Calculations: Paragraph 6B of Schedule 41 outlines penalty ranges based on culpability. The Company's behavior was classified as deliberate but not concealed, aligning with a penalty range of 35% to 70%. Given the Company's cooperation, the Tribunal applied the lower end of the spectrum (35%).
Prompted vs. Unprompted Disclosure: The Tribunal determined that the Company's disclosure of the unauthorized invoices was prompted, as it occurred in response to HMRC's inquiries, negating any reduction due to unprompted disclosure under paragraph 12 of Schedule 41.
Special Circumstances: The Company's personal circumstances, including the adoption process of Mr. Gibbons, were considered but deemed insufficient to qualify as 'special circumstances' warranting further penalty reduction.

Impact

This judgment reinforces the stringent expectations HMRC places on VAT compliance, particularly emphasizing the necessity for authorized invoicing practices. The key impacts include:

Clarity on Deliberateness: By outlining that awareness of unauthorized status suffices for deliberate behavior, the judgment provides clear guidance for future cases regarding the assessment of culpability.
Penalty Framework: The Tribunal's application of the 35% penalty in accordance with cooperation levels sets a benchmark for similar cases, indicating that transparency and cooperation can mitigate but not eliminate penalties.
Disclosure Expectations: The differentiation between prompted and unprompted disclosures underscores the importance of proactive compliance, with prompted disclosures not benefiting from significant penalty reductions.
Legal Precedent: The decision, alongside the Contractors 4 U Ltd case, solidifies the interpretation of Schedule 41's provisions, aiding legal practitioners in advising clients on VAT compliance and potential repercussions.

Complex Concepts Simplified

Unauthorized Issue of VAT Invoices

An unauthorized issue of VAT invoices occurs when a company that is not registered for VAT nonetheless includes VAT charges on its invoices. This is prohibited under VAT law, and penalties can be imposed for such actions.

Deliberate Behavior in Legal Terms

In the context of this case, "deliberate" does not require intent to deceive or gain unfair advantage. Instead, it means intentionally issuing unauthorized VAT invoices with the awareness that such action is not permitted.

Schedule 41 of the Finance Act 2008

Schedule 41 outlines various penalties related to VAT compliance failures, including unauthorized invoicing. It specifies conditions under which penalties are applied and the degree of culpability required, which influences the penalty amount.

Potential Lost Revenue

Potential lost revenue refers to the amount that HMRC estimates was lost due to the unauthorized VAT charges on invoices. This figure is used as the basis for calculating the penalty percentage.

Conclusion

The Kinesis Positive Recruitment Ltd v. Revenue and Customs judgment underscores the critical importance of strict VAT compliance and the serious repercussions of unauthorized invoicing practices. By clarifying the interpretation of "deliberate" behavior and reinforcing the application of penalties under Schedule 41 of the Finance Act 2008, the Tribunal has set a clear precedent for future cases.

Key takeaways include:

Awareness of unauthorized VAT invoicing suffices for establishing deliberate behavior, irrespective of intent to deceive.
Cooperation with HMRC can mitigate penalties but does not absolve the taxpayer from liability.
Personal circumstances, such as distraction due to personal matters, do not constitute 'special circumstances' for reducing penalties.
The judgment provides a definitive framework for assessing culpability and penalties in cases of unauthorized VAT invoicing.

Overall, this case serves as a salient reminder to businesses about the imperative of maintaining accurate VAT registration statuses and ensuring adherence to invoicing regulations to avoid substantial penalties.