Commissioners of Customs and Excise v Peninsular and Oriental Steam Navigation Company
| Jurisdiction | England & Wales |
| Judgment Date | 26 January 1994 |
| Date | 26 January 1994 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Balcombe and Peter Gibson L JJ and Sir Tasker Watkins.
David Milne QC, Gerald Barling QC and Adrian Shipwright (instructed by Lovell White Durrant) for P & O.
Kenneth Parker QC and Alison Foster (instructed by the Solicitor for Customs and Excise) for the Crown.
The following cases were referred to in the judgment:
C & E Commrs v Fine Art Developments plc ELRVAT[1989] AC 914; (1989) 4 BVC 26
Castle VAT(MAN/91/636) No. 7530; [1992] BVC 1479
Davis v Johnson ELR[1979] AC 264
Gordon's Connection Ltd VAT(LON/91/2577) No. 7630; [1992] BVC 821
Jones & Anor VAT(MAN/91/620) No. 6514; [1991] BVC 1458
Riggs & Webb Ltd; VAT(LON/91/914) No. 6759; [1992] BVC 586
Tuck & Sons v Priester ELR(1887) 19 QBD 629
Value added tax - Serious misdeclaration penalty - Input tax erroneously claimed in April return but not claimed in May return so that error was corrected - Error discovered by Customs - Whether liability for 30 per cent penalty - Finance Act 1985 section 14 subsec-or-para (4)Finance Act 1985, s. 14(4)(the penalty under Finance Act 1991 section 14 subsec-or-para (1)s. 14(1) was reduced to 20 per cent by Finance Act 1991,Finance Act 1992 section 18s. 18 for penalties assessed after 19 March 1991 and to 15 per cent by Finance Act 1992, s. 7(1) for penalties assessed after 10 March 1992 in relation to prescribed accounting periods beginning after 31 March 1992).
This was an appeal by the taxpayer ("P & O") from a decision ofSimon Brown J VAT([1992] BVC 170) that P & O was liable for a serious misdeclaration penalty under the Value Added Tax Act 1983, section 14 subsec-or-para (1)s. 14(1) having overclaimed input tax in one period, but having eliminated the error by an underdeclaration in the next period.
The taxpayer ("P & O") accounted for VAT monthly. On 30 May 1990 they rendered a monthly return for April claiming credit for input tax relating to invoices amounting to £330,988 dated 2 May which should have been brought into account in the return for May. The May return was rendered on 29 June. It omitted any reference to the two May invoices. Thus, P & O overclaimed in their April return input tax to the extent of £330,988 and in the May return underclaimed to the same extent. In July the error was discovered by an officer of Customs on a routine visit to P & O.
P & O appealed to the VAT tribunal ([1991] BVC 671) against a 30 per cent serious misdeclaration penalty, under the Finance Act 1985 section 14 subsec-or-para (1)Finance Act 1985, s. 14(1). It was common ground that if P & O's error had not come to light before 20 March 1991, a concession made with effect from that date that an error compensated in the following period would not constitute a serious misdeclaration would have applied.
Customs' case was that P & O in the April return had overstated their entitlement to input tax within the meaning of s. 14(1)(a). The tax which would have been lost to Customs if the inaccuracy had not been discovered was £330,742. That sum exceeded 30 per cent of the true amount of tax for that period and also exceeded the greater of £10,000 and 5 per cent of the true amount of tax for that period. Thus the circumstances set out in s. 14(2)(a) and (b) were satisfied.
The tribunal allowed P & O's appeal but Customs' appeal to the High Court was allowed on the grounds that the language of s. 14(5A), "it shall be assumed for the purposes of subsection (5) above", limited the scope of the provision to the purposes of s. 14(5), leaving s. 14(2) in operation. Accordingly, even if P & O's April return was corrected by the May return, the circumstances set out in s. 14(2) remained satisfied.
In the Court of Appeal P & O raised a new argument based on s. 14(4) which provided that if for "any period there was an understatement of credit for input tax or an overstatement of output tax, allowance should be made for that error in determining for that period the tax which would have been lost". The expression "any period" was to be taken literally, and in the present case would include the period of the calendar month of May 1990. In its return for the May period P & O understated its credit for input tax which it had mistakenly claimed in the April period. If allowance were made for the error in the May return, then no tax would have been lost for the April period so as to give rise to liability for a penalty under s. 14(1).
Customs contended that, both on the wording of s. 14(4) and on policy considerations, the phrase "that period" where it occurred at the end of s. 14(4) must refer to the last immediately preceding period mentioned, i.e. "any period". "Any period" meant only the prescribed accounting period in question. Further, P & O's construction of s. 14(4) would be contrary to the policy of the legislation by allowing a taxpayer to trawl through any number of accounting periods to find compensating errors to be set off against an acknowledged error. That would defeat the object of a provision which was designed to ensure that the correct amount of tax was returned at the correct time. Customs suggested that taxpayers might make deliberate errors to provide a reserve for any future mistake which might lead to a serious misdeclaration penalty or make a deliberate error in a subsequent return to compensate for an error which had been discovered.
Held, allowing P & O's appeal:
1. The use of the phrase "any period" in s. 14(4), as opposed to "that period" which occurred three times in the provision, was striking. If it had been intended to confine the period for which an allowable error had been made to the single prescribed accounting period in question it could easily have been made clear: "that period" could have been used for the fourth time. The reason for using the phrase "any period" must have been because it was intended to have a different meaning from "that period". The word "any" was to be used literally. Thus, if there were an understatement of credit for "any period", allowance was to be made for that error in determining the tax for a period for which tax would have been lost if an inaccuracy had not been discovered. Self-cancelling errors were to be dealt with under s. 14(4) with the limitation that "any period" in s. 14(4) should be apply only to periods before discovery of the error.
2. If the true construction of s. 14(4) were in doubt, it should be resolved in favour of P & O. If there was a reasonable interpretation of a penal section which would avoid the penalty, the court should adopt it and if there were two reasonable constructions the court should give the more lenient one: Tuck & Sons v PriesterELR(1887) 19 QBD 629 per Lord Esher at p. 638 followed.
3. It would be unreal to suppose that in practice taxpayers would make interest-free loans to Customs to guard against future liability for penalties by making deliberate errors in case other errors should emerge later.
By a notice of appeal dated 26 October 1992 P & O appealed against the judgment of Simon Brown J delivered on 30 September 1992 upholding a penalty for serious misdeclaration imposed under the Finance Act 1985 section 14 subsec-or-para (1)Finance Act 1985, s. 14(1). The grounds of the appeal were that the judge had erred in law in holding that the circumstances set out in s. 14(2) were satisfied.
Balcombe LJ: The appellants, the Peninsular and Oriental Steam Navigation Company ("P & O"), are taxable persons for the purposes of VAT. Their prescribed accounting period is a calendar month, so that their VAT returns are rendered monthly.
On 30 May 1990, P & O rendered a monthly return for the calendar month of April 1990 (the April return) as follows:
| £ | |
| VAT due in this period on sales and other outputs: | 736,355 |
| VAT reclaimed in this period on purchases and other inputs: | 1977,211 |
| Net VAT to be … reclaimed by you (difference between the two figures): | 1240,855 |
The figure of £1,977,211 included £334,987 worth of input tax recoverable under two invoices dated 2 May 1990. Being May invoices, they should have been brought into account in the May return. It was wrong to have included them in the April return.
The May return was rendered on 29 June 1990. It omitted any reference to the two May invoices or the input tax to which they referred.
Thus, P & O overclaimed in their April return input tax to the extent of £345,988 and in their May return underclaimed it to the like extent. That error was discovered by the commissioners' VAT officer on a routine audit control visit to P & O on 17 July 1990.
On 21 August 1990 the commissioners imposed a serious misdeclaration penalty of £99,222.60, representing 30 per cent of £330,742 (that being, for reasons immaterial to this appeal, the relevant sum for calculating the penalty). They further assessed P & O to default interest in the sum of £3,459.23.
P & O appealed against this assessment to the London VAT tribunal (chairman His Honour Judge Medd QC) who, by a decision released on 30 April 1991, allowed the appeal by reducing the assessment by the amount of the serious misdeclaration penalty of £99,222.60. The amount claimed for default interest stood. The commissioners then appealed against this decision to the Queen's Bench Division of the High Court. There was no cross-appeal by P & O in relation to the default interest.
On 30 September 1992 Simon Brown J allowed the commissioners' appeal and reinstated the assessment. He gave leave to appeal to this court.
Originally persons who made default in compliance with their obligations under the VAT legislation were penalised through a criminal offence code. However, as a result of the recommendations of the Committee on Enforcement Powers of the Revenue Departments under the chairmanship of Lord Keith of Kinkel ("the Keith Committee") Cmnd. 8822 of 1983...
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