Commissioners of Customs and Excise v Peninsular and Oriental Steam Navigation Company
| Jurisdiction | England & Wales |
| Judgment Date | 30 September 1992 |
| Date | 30 September 1992 |
| Court | Queen's Bench Division |
Queen's Bench Division (Crown Office List).
Simon Brown J.
Nigel Pleming QC (instructed by the Solicitor for Customs and Excise) for the Crown.
John Gardiner QC and Francis Fitzpatrick (instructed by Freshfields) for P & O.
The following cases were referred to in the judgment:
Anklagemyndigheden (Public Prosecutor) v Hansen & Søn I/S(Case 5326/88) [1990] ECR I-2911
Associated Provincial Picture Houses Ltd v Wednesbury CorpELR[1948] 1 KB 223
Atalanta Amsterdam BV v Producktschap voor Vee en Vlees (Case 240/78) [1979] ECR 2137; Common Market Reporter §8594
Drexl, Re (Case 299/86) [1988] ECR 1213; [1989] 1 CEC 565
Emmett (W) & Son Ltd (No. 2) VAT(LON/90/1316) No. 6516; [1991] BVC 896
Internationale Handelsgesellschaft mbH v Einfuhr-und Vorratstelle für Getreide und Futtermittel (Case 11/70) [1970] ECR 1125; Common Market Reporter §8126
Luke v IR Commrs ELR[1963] AC 557
Maas (A) & Co NV v Bundesanstalt für landwirtschaftliche Marktordnung (Case 21/85) [1986] ECR 3537; Common Market Reporter §14,396
R v Intervention Board for Agricultural Products (IBAP), ex parte ED & F Man (Sugar) Ltd, (Case 181/84) [1985] ECR 2889; Common Market Reporter §14,236
Riggs & Webb Ltd VAT(LON/91/914) No. 6759; [1992] BVC 586
Tuck & Sons v Priester ELR(1887) 19 QBD 629
Wachauf v Bundesamt für Ernährung und Forstwirtschaft(Case 5/88) [1989] ECR 2609
Value added tax - Serious misdeclaration - Penalty - Correction of returns by taxpayer - Input tax erroneously claimed in April return but not claimed in May so that error was corrected - Error discovered by Customs - Whether penalty properly imposed for serious misdeclaration in April return - Whether correction procedure could be invoked if error discovered by Customs rather than by taxpayer - Finance Act 1985 section 14 subsec-or-para (5)Finance Act 1985, sec. 14(5) (as amended by the Finance Act 1988) Finance Act 1988 section 14 subsec-or-para (5A)sec. 14(5A); SI 1989/2248 regulation 5 regulation 8Value Added Tax (Accounting and Records) Regulations 1989 (SI 1989/2248), regs. 5, 8(4).EC Community law - Proportionality principle - Whether proportionality principle applicable to penalty regime in cases where serious misdeclaration penalty imposed although no tax was lost - Sixth VAT Directive 77/388 of 17 May 1977 (OJ 1977 L145/1),eu-directive 77/388 article 22(8)art. 22(8).
This was an appeal by Customs and Excise from a decision of the VAT tribunal ([1991] BVC 671) that if an error in a VAT return was corrected by a balancing error in a later return, the Finance Act 1985,Finance Act 1985 section 14 subsec-or-para (5A)sec. 14(5A) operated to preclude the imposition of a penalty.
P & O made monthly VAT returns. On 30 May 1990 it made a return for April which 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 which was rendered on 30 June 1990 omitting any reference to the two May invoices included erroneously in the April return. The error was discovered by a VAT officer on a routine visit to P & O on 17 July 1990.
An assessment was raised against P & O in August 1990 imposing a serious misdeclaration penalty of £99,222.60 on the basis that P & O had overstated their entitlement to input tax in the May return within Finance Act 1985 section 14 subsec-or-para (1)sec. 14(1)(a) of the Finance Act 1985.
Before the VAT tribunal the central argument concerned P & O's entitlement under reg. 5 of the Value Added Tax (Accounting and Records) Regulations 1989 to correct their April return. It was assumed by both parties that if they were entitled to correct that return, then, by virtue of Finance Act 1985 section 14 subsec-or-para (5A)sec. 14(5A) of the 1985 Act, no penalty would be exigible.
P & O contended that the errors made respectively in the April and May returns had been "discovered" in the "prescribed accounting period" of July; that the difference between the April underdeclaration and the May overdeclaration did not exceed £1,000 (it was nil). Accordingly they were entitled to correct the April return when submitting the May return. However, given the precise correlation between the two amounts, the April and May returns were corrected without P & O taking any further action.
Customs contended before the tribunal that the word "discovery" inSI 1989/2248 regulation 5reg. 5(3) meant only discovery by the taxpayer. If the error was discovered by an officer of Customs the taxpayer could not invoke the correction procedure. Moreover, Customs asserted that since P & O had taken no action to correct their April return, it could not be said that they had "corrected" it.
The tribunal allowed the appeal holding that the overstatement of the input tax claim in the April return, exactly compensating for the understatement in the May return, had corrected the April return without any further action on the part of the taxpayer and the unqualified word "discovered" in SI 1989/2248 regulation 5reg. 5(3) was not limited to discovery by the taxpayer.
Before the High Court Customs no longer accepted that no penalty was exigible if P & O were entitled by the regulations to correct their return. Even if the return had been corrected, if the conditions required by SI 1989/2248 regulation 5reg. 5(2) were satisfied a penalty might be imposed. Subsection (5A) required simply an assumption "for the purposes of subsection (5)" which dictated no more than what was meant by the expression "the true amount of tax".
P & O argued first that, although subsec. (5A) expressly provided for an assumption "for the purposes of subsection (5) above", it really fell to be construed as extending the assumption to the whole ofFinance Act 1985 section 14sec. 14.
Second, in the light of the 1989 regulations, Finance Act 1985 section 14sec. 14 could not operate to create a penalty liability once an inaccurate return was corrected. Since, by SI 1989/2248 regulation 8reg. 8(4), the regulations operated so that earlier incorrect returns were deemed to be correct once the corrective process had been invoked, the penalty liability underFinance Act 1985 section 14 subsec-or-para (1)sec. 14(1)(a) was immediately expunged because the return in question could no longer be said to understate the taxpayer's liability or overstate his entitlement.
Third, the amendments made to Finance Act 1985 section 14sec. 14 of the 1985 Act by the Finance Act 1988, which substituted in subsec. (5) the term "this section" for "subsections (2)(a) and (3)" indicated that Parliament intended the assumption inFinance Act 1988 subsec-or-para (5A)subsec. (5A), also introduced by the Finance Act 1988, to be extended to the wh ole of Finance Act 1985 section 14sec. 14.
Moreover, there was at least an ambiguity in the legislation, and, given its penal nature and the inequitable result which would flow from Customs' construction, that a mere error of timing would render the taxpayer liable to a penalty, the court should lean towards P & O's construction.
P & O argued in the alternative that the principle of proportionality under EC Community law obliged the court to rule thatFinance Act 1985 section 14 subsec-or-para (1)sec. 14(1) was unlawful and of no effect in so far as it penalised taxpayers like P & O whose misdeclarations involved mere errors of timing and from whom no tax was outstanding when the penalty arose.
Held, allowing Customs' appeal:
1. The language of subsec. (5A), "it shall be assumed for the purposes of subsection (5) above", limited the scope of subsec. (5A) to the purposes of subsec. (5), leaving subsec. (2) in operation. Accordingly, even if P & O's April return was "corrected" by the May return, the circumstances set out in subsec. (2) were satisfied in that the inaccuracy in the April return exceeded 30 per cent of the true amount of tax and exceeded £10,000. A penalty might therefore be imposed.
2. The scope of the word "discovered" in SI 1989/2248 regulation 5reg. 5(3) of the 1989 regulations had become less important in the light of the conclusion reached on the construction ofFinance Act 1985 section 14 subsec-or-para (5A)sec. 14(5A) but, given the penal character of the provisions, SI 1989/2248 regulation 5reg. 5(3) could not be construed as limited to discovery by the taxpayer.
3. P & O had to establish that Community law, and thus the principle of proportionality, applied to the misdeclaration provisions so that the court was not merely entitled but bound to determine whether the penalty regime accorded with the principle. It had also to be established that the application of Finance Act 1985 section 14sec. 14 of the 1985 Act to P & O's case offended the principle of proportionality and was therefore unlawful.
eu-directive 77/388 article 22(8)Article 22(8) of the sixth directive conferred a discretion on member states to impose obligations which they might deem necessary for the correct levying and correction of the tax and for the prevention of fraud. In certain circumstances penalties provided by national legislation might be so disproportionate as to threaten the proper functioning of the harmonised system of VAT, but only most exceptionally could the court properly invoke the principle. Under UK law, by Finance Act 1985 section 21sec. 21 of the 1985 Act, Customs had a discretion whether to exact a penalty by which any disproportionate consequences ofFinance Act 1985 section 14sec. 14 might be mitigated, and since no challenge to the exercise of that discretion had been suggested, P & O's arguments failed.
By a notice of motion the Commissioners of Customs and Excise appealed against a decision of the VAT tribunal (chairman His Honour JudgeMedd QC). The grounds of the appeal were
1. The tribunal erred in law in holding that:
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(a) The error in the return for the...
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