Auxilium Project Management Ltd v Revenue and Customs (VAT - PENALTIES : Other)

Factual and Procedural Background

This appeal concerns a penalty imposed by the Respondents under Schedule 24 of the Finance Act 2007 against the Appellant, Company A, for submitting a VAT return containing an inaccuracy for the three-month period ended 30 September 2014 (the 09/14 period). The penalty was calculated on the basis that the inaccuracy was deliberate but not concealed and amounted to £7,878.60. Company A did not dispute the existence of the inaccuracy but challenged whether it was deliberate within the statutory meaning.

Company A, providing project management services, had transitioned from a flat rate VAT scheme to the standard cash accounting basis for the 09/14 period. The inaccuracy related to payments received from a former related company (Company B) which were treated as excluding VAT. Company A’s director prepared the return believing the treatment was correct based on cash flow considerations and the timing of input VAT recovery by Company B.

HMRC opened an enquiry into Company B’s repayment claim and raised concerns about the VAT treatment on Company A’s return. Following an inspection and correspondence, HMRC decided to impose a penalty for a deliberate but not concealed inaccuracy. Company A appealed the penalty to the Tribunal.

Legal Issues Presented

1. Whether the inaccuracy in the VAT return for the 09/14 period was deliberate but not concealed within the meaning of paragraph 3(1)(b) of Schedule 24 Finance Act 2007.

Arguments of the Parties

Respondents' Arguments

• The inaccuracy was deliberate, involving conscious thought by the director of Company A.
• The director knew input tax was being reclaimed by Company B but deliberately chose not to declare the corresponding output tax on Company A’s return due to cash flow issues.
• A responsible taxpayer would have contacted HMRC before submitting the return to resolve the issue.

Appellant's Arguments

• The burden of proof rested on HMRC to show the inaccuracy was deliberate.
• The errors were mistakes made by Company A’s director and its agent, the auditing firm, and were at worst careless, not deliberate.
• Company A had acknowledged the error and cooperated fully, making no attempt to conceal it.
• The error was due to the agent’s mistake, and Company A had taken reasonable care in appointing the agent, thus paragraph 18(2) Schedule 24 should apply to relieve Company A from penalty liability.

Table of Precedents Cited

Court's Reasoning and Analysis

The Tribunal focused on the statutory test for a deliberate inaccuracy, which requires that the taxpayer knowingly and intentionally provide HMRC with a document containing an inaccuracy. This is a subjective test based on the taxpayer’s knowledge and intention at the time, distinct from a careless inaccuracy which results from failure to take reasonable care.

The Tribunal found the director of Company A to be honest and credible, accepting her evidence that she believed the VAT return was accurate based on her understanding of the cash accounting treatment and the cash flow situation of Company B. The correspondence and communications supported this belief, indicating the cash flow issue related to Company B rather than Company A.

Consequently, the Tribunal concluded the inaccuracy was not deliberate. It was an innocent mistake by the taxpayer compounded by an error of the agent. While the error was careless, the Tribunal did not accept that Company A had taken reasonable care sufficient to exclude liability under paragraph 18(2) because the director could not be entirely absolved from responsibility.

However, the Tribunal noted that HMRC had treated the disclosure as unprompted and had allowed full mitigation for cooperation, which justified reducing the penalty to nil.

Holding and Implications

The Tribunal ALLOWED the appeal and reduced the penalty to nil.

The direct effect of this decision is that Company A is not liable to pay the penalty originally imposed for the inaccuracy in its VAT return. The Tribunal did not establish any new legal precedent but applied existing principles regarding deliberate and careless inaccuracies in the context of VAT penalties and professional advice.