Factual and Procedural Background
This appeal concerns penalty assessments under Schedule 24 of the Finance Act 2007 related to inaccuracies in the Appellant's VAT returns. Three penalty assessments were issued: one for the VAT period ending September 2012, alleged to be careless errors, and two for the VAT period June 2014, alleged to be deliberate errors. The Appellant supplies promotional products sourced mainly from China to major companies, with a complex supply process and critical cash flow management.
The Appellant's accountant, an ACCA qualified employee, was responsible for preparing and submitting VAT returns and had been trusted by the directors. However, significant errors and irregularities were discovered during HMRC visits in 2012 and 2014, including underdeclarations and incorrect VAT reclaim methods, particularly relating to import VAT and German VAT claims. The accountant concealed these errors and penalties from the directors, who were unaware until late 2014.
The company experienced a serious fraud by a Hong Kong office manager between 2007 and 2011, which distracted the directors and affected company operations. The accountant was given increasing autonomy and responsibility, including authorising payments herself. Errors persisted despite HMRC advice, and the accountant was on maternity leave during the 2014 VAT return period. The Appellant implemented new procedures after these events to prevent recurrence.
The appeal also involves a disputed adjustment related to invoices issued to a major customer, with parties attempting to agree on this issue separately. The Appellant challenges the penalties, the classification of errors as careless or deliberate, and HMRC's refusal to suspend or reduce penalties.
Legal Issues Presented
- Whether the Appellant took reasonable care in submitting accurate VAT returns.
- Whether the inaccuracies in the VAT returns were the result of deliberate behaviour.
- Whether HMRC discharged the burden of proof to establish carelessness or deliberate behaviour.
- Whether a supply had taken place regarding the disputed invoices (Talbots issue).
- When an employer is responsible for the acts of an employed accountant or employee.
- Whether HMRC acted unreasonably, in the Wednesbury sense, in refusing to suspend penalties or make special reductions.
Arguments of the Parties
Appellant's Arguments
- HMRC bears the burden of proving the errors and their nature (careless or deliberate).
- No potential lost revenue arose from the German VAT claims as these were offset by corresponding claims in Germany.
- The Appellant took reasonable care by employing a qualified accountant to manage VAT matters.
- None of the errors were deliberate.
- HMRC should have informed the directors directly about penalties and assessments.
- The Appellant has a reasonable excuse for any errors.
- HMRC should have granted special reductions in penalties due to special circumstances.
- HMRC's refusal to suspend penalties was flawed and should be reconsidered.
Respondent's Arguments
- The Appellant, as the taxpayer, is responsible for accurate VAT returns.
- The actions of the employed accountant are attributable to the Appellant.
- The accountant acted carelessly in 2012 and deliberately in 2014, justifying the penalties.
- Alternatively, the 2014 errors were careless.
- It is not credible that the directors were unaware of previous penalties; they failed to exercise proper oversight as required by the Companies Act 2006.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Marks & Spencer plc v Commissioners of Customs and Excise (Case C-309/06) |
EU principles of equal treatment and fiscal neutrality in VAT repayment claims. |
The Court found that domestic law provisions refusing repayment on unjust enrichment grounds did not infringe EU principles; however, this case was distinguished as not directly applicable to the issue of cross-border VAT penalty calculations. |
| Christopher Horne v HMRC [2013] UKFTT 177 (TC) |
Special reduction of penalties where excess tax paid offsets underpayment. |
Referenced to argue that penalties should consider overall tax position; however, the Tribunal found no general principle allowing cross-border offsetting in this case. |
| Mahendran v HMRC [2015] UKFTT 278 (TC) |
Whether acts of an employee can be attributed to the company for penalty purposes. |
Considered in relation to reasonable reliance on competent employees; the Tribunal emphasized the distinction between whether the employee's acts can be attributed to the company. |
| McNicholas Construction Co Ltd. v HMRC [2000] STC 553 |
Attribution of fraudulent acts of employees to the company and the Hampshire Land principle (breach of duty exception). |
The Court held that the company could be held responsible for employees' fraudulent acts when it promotes the policy of the legislation; the breach of duty exception applies only where acts are directed at harming the company. |
| Mobile Sourcing Limited v HMRC [2016] UKUT 274 (TCC) |
Application of McNicholas and attribution principles post Bilta. |
Confirmed that wrongful acts of employees can be attributed to the company in disputes with third parties such as HMRC. |
| Bilta (UK) Ltd v Nazir (No. 2) [2016] AC 1 |
Refinement of breach of duty exception and attribution of employee wrongdoing to company. |
Clarified that as between company and third parties, employee wrongdoing is attributed to the company; the breach of duty exception is limited and does not protect employees from claims by the company. |
| Collis v Revenue and Customs Commissioners [2011] UKFTT 588 (TC) |
Definition of "reasonable care" for VAT penalty purposes. |
The Tribunal applied the standard of a prudent and reasonable taxpayer in the appellant's position to assess carelessness. |
| Auxilium Project Management Ltd v HMRC [2016] UKFTT 249 (TC) |
Definition of deliberate inaccuracy in VAT returns. |
Adopted the subjective test that deliberate inaccuracy occurs when a taxpayer knowingly submits an inaccurate document intending reliance by HMRC. |
| Anthony Clynes v HMRC [2016] UKFTT 369 (TC) |
Extension of deliberate inaccuracy to include deliberate ignorance. |
Held that deliberately refraining from ascertaining the correct position, when aware one should, can constitute a deliberate inaccuracy. |
| Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223 |
Standard for judicial review of unreasonableness (Wednesbury unreasonableness). |
Applied to assess whether HMRC's refusal to suspend penalties was so unreasonable as to justify Tribunal intervention. |
| Council of Civil Service Unions v Minister for the Civil Service [1985] AC 374 |
Clarification of Wednesbury unreasonableness standard. |
Reinforced the high threshold for finding a decision unreasonable in judicial review. |
| AA (Uganda) v Secretary of State for the Home Department [2008] EWCA Civ 579 |
Application of Wednesbury unreasonableness. |
Referenced to support the high standard required to overturn administrative decisions. |
| AXA General Insurance Ltd v HM Advocate [2011] UKSC 46 |
Illustration of Wednesbury unreasonableness standard. |
Used to exemplify the extreme nature of decisions that qualify as unreasonable. |
| R v Secretary of State for the Home Department ex p Brind [1991] 1 AC 696 |
Judicial review standard emphasizing supervisory role of courts. |
Emphasized that courts should not substitute their own judgment for that of the decision-maker. |
| Secretary of State for Education and Science v Tameside Metropolitan Borough Council [1977] AC 1014 |
Limits on findings of unreasonableness in judicial review. |
Confirmed that differences of opinion do not constitute unreasonableness. |
Court's Reasoning and Analysis
The Tribunal first addressed the burden of proof, confirming that HMRC must prove the nature of the inaccuracies on the balance of probabilities. It rejected the Appellant's argument that cross-border VAT claims negate potential lost revenue for penalty purposes, holding that Schedule 24 penalties relate only to UK tax and HMRC is not required to consider foreign tax positions.
On attribution, the Tribunal examined authorities including McNicholas, Mobile Sourcing, and Bilta, concluding that the wrongful acts of an employee responsible for VAT returns are attributable to the company for penalty purposes, even if those acts were against the company's interests. The breach of duty exception applies narrowly and does not protect the company from penalties due to employee wrongdoing.
The Tribunal distinguished the question of whether the directors acted reasonably in relying on the accountant from whether the accountant's conduct is attributable to the company. It held that the relevant question is whether the employee (the accountant) took reasonable care in preparing the returns.
Regarding the nature of inaccuracies, the Tribunal found the 2012 errors to be careless based on their basic nature, repetition after HMRC advice, and the accountant's attitude. For the 2014 return, although the errors were initially alleged to be deliberate, the Tribunal found insufficient evidence that the accountant intended the inaccuracies, considering the difficult circumstances including pregnancy and illness. The 2014 errors were therefore also careless.
The Tribunal rejected the Appellant's submission for special reduction based on the matched UK overclaim and German underclaim, holding that HMRC was entitled to consider only UK tax and that the officers' decisions were within a reasonable range, not flawed in the judicial review sense.
On suspension of penalties, the Tribunal applied the Wednesbury unreasonableness standard and found that HMRC's refusal to suspend the 2012 penalty was not flawed. The decision was based on the officer's reasonable assessment of the accountant's attitude and likelihood of compliance with conditions. The failure to consult the directors was not fatal as HMRC reasonably dealt with the person responsible for VAT matters and was unaware of the concealment.
Holding and Implications
The Tribunal's final decision is as follows:
- The penalty for careless inaccuracy on the September 2012 VAT return is affirmed.
- The penalty for the import VAT errors on the June 2014 VAT return is reduced from deliberate to careless inaccuracy, and the penalty amount is reduced accordingly to 15% of the potential lost revenue.
- The Tribunal finds no special circumstances warranting a further reduction in penalties.
- The refusal by HMRC to suspend the penalties is upheld as not unreasonable or flawed.
- The Tribunal will consider separately the penalty related to the disputed Talbots invoices if the parties fail to reach agreement.
These decisions confirm the application of Schedule 24 penalty provisions to errors made by employees attributed to the company, affirm the high threshold for judicial review of HMRC's penalty decisions, and clarify that UK penalties are calculated solely on UK tax losses without offsetting foreign tax claims. No new legal precedent beyond the application of established principles was set.