Donnelly
| Jurisdiction | UK Non-devolved |
| Judgment Date | 29 October 2019 |
| Neutral Citation | [2019] UKFTT 655 (TC) |
| Date | 29 October 2019 |
| Court | First Tier Tribunal (Tax Chamber) |
[2019] UKFTT 655 (TC)
Judge Charles Hellier, Christopher Jenkins
Momcilo Novakovic of Novakovic & Co appeared for the appellant
Jenny Goldring, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents
Value added tax – MTIC fraud or fraud connected with no supply – Penalty assessed on a company for deliberate inaccuracy attributed to director under FA 2007, Sch. 24, para. 19 – Whether inaccuracy deliberate – Whether attributable to director – If no supply made whether declaration of output tax was an inaccuracy within Sch. 24, para. 6(2) – Whether Sch. 11, para. 5 treated VAT put on an invoice as output tax when no supply – Art. 203 VAT Directive considered.
[1] Mr Donnelly was at material times the only director of Korum Wholesale Trading Limited (“KW”). KW made VAT returns for the periods 04/14, 07/14 and 10/14 (the “3 VAT Periods”). In total those returns declared output tax of £400,659.88 and input VAT of £399,857.88 leaving a small net VAT liability. Invoices were sent to HMRC which indicated that the outputs derived from sales to PWG Micro Brewers Ltd (“PWG”), of which a Patrick Galvin was a or the director, of 11 consignments of alcoholic drinks, and that the inputs derived from 11 matching consignments of drinks sold to KW by the proprietor of a business trading as Beehive Wine Stores. We refer to the transactions specified in these matching invoices as the “11 Deals”.
[2] HMRC began to investigate KW's activities in May 2014, and, following correspondence and discussions with Mr Donnelly and a Richard Galvin (the father of Patrick Galvin), they concluded that the supply to KW was connected to a fraudulent evasion of VAT by KW's supplier, and that KW, in the person of Mr Donnelly, knew of that connection. As a result they came to a decision that KW was not entitled to input tax credit in respect of the input VAT on the Beehive invoices on the basis of the judgement of the ECJ in Kittel v Belgium; Belgium v Recolta Recycling SPRL (Joined Cases C-439/04 and C-440/04) [2008] BVC 559 (“Kittel”).
[3] HMRC then concluded that the consequent inaccuracy in the VAT returns (namely the claim for the input tax under the invoices from Beehive) was deliberate, and had been concealed. As a result they imposed a penalty on KW under Schedule 24 FA 2007 of 95% of the amount of the input tax claimed, namely £379,864.98.
[4] Finally HMRC decided that the deliberate inaccuracy was attributable to Mr Donnelly and notified Mr Donnelly under paragraph 19 Schedule 24 FA 2007 that he was liable to pay 100% of the penalty. Mr Donnelly appeals against that notice.
[5] There was no dispute about the meaning or terms of the Kittel decision. A person is not entitled to input tax credit in respect of a supply to him if: (i) there has been a fraudulent evasion of VAT, (ii) the supply to him was connected to that evasion, and (iii) he knew or should have known that the supply was so connected. HMRC contended that each of these conditions was satisfied and that the condition in (ii) was satisfied because KW (in the person of Mr Donnelly) knew of the connection to fraud.
[6] Schedule 24 FA 2007 contains the following provisions:.
1. (1) A penalty is payable by a person (P) where–
- P gives HMRC a document of a kind listed in the Table below [this includes a VAT return, and a return, statement or declaration in connection with a VAT claim] and
- Conditions 1 and 2 are satisfied.
(2) Condition 1 is that the document contains an inaccuracy which amounts to, or leads to–
- an understatement of P's liability to tax …
(3) Condition 2 is that the inaccuracy was careless or deliberate (within the meaning of paragraph 3 …
…
3 (1) Inaccuracy in a document given by P to HMRC is
… (c) deliberate and concealed if the inaccuracy is deliberate and P makes arrangements to conceal it (for example, by submitting false evidence in support of an inaccurate figure …
4 (1) The penalty payable under paragraph 1 is –
… (c) for deliberate and concealed action, 100% of the potential lost revenue.
5 (1) “The potential lost revenue” in respect of an inaccuracy in a document … is the additional amount due or payable in respect of tax as a result of correcting the inaccuracy or assessment …
6 … (2) In calculating potential lost revenue where P is liable to a penalty in respect of one or more understatements in one or more documents relating to a tax period, account shall be taken of any overstatement in any document given by P which relates to the same tax period.
(3) In subparagraph (2)–
- understatement means an inaccuracy that satisfies Condition 1 of paragraph 1, and
- overstatement means an inaccuracy that does not satisfy that condition.
(4) For the purposes of paragraph (2) overstatements shall be set against understatements in the following order –
- understatements in respect of which P is not liable to a penalty,
- careless understatements,
- deliberate but not concealed understatements, and
- deliberate and concealed understatements.
10(6) Where a person who would otherwise be liable to a 100% penalty has made a prompted disclosure, HMRC shall reduce the 100% to a percentage, not below 50%, which reflects the quality of the disclosure.
11 [provides for a reduction in special circumstances]
19(1) Where a penalty under paragraph 1 is payable by a company for a deliberate inaccuracy which was attributable to an officer of the company–
- the officer as well as the company shall be liable to pay the penalty, and
- HMRC may pursue the officer for such portion of the penalty (which may be 100%) as they may specify by written notice to the officer.
[7] Paragraph 19 provides paragraph 15, which provides that P may appeal against the decision of HMRC that a penalty is payable or its amount, has effect as if the penalty were assessed on the officer. Paragraph 17 provides that on such an appeal the tribunal may substitute for HMRC's decision another decision which HMRC had the power to make, although the tribunal's power in relation to the reduction of a penalty by reason of special circumstances paragraph 11 is engaged only if HMRC's decision was flawed – that is to say if it took into account irrelevant factors, ignored relevant factors, was made under a mistake of law or was such that no reasonable body could have made it.
[8] Two issues of interpretation arise in relation to Schedule 24. The first is the proper construction of “deliberate” in particular in paragraph 4 (2) Schedule 24, and the second the proper construction of “attributable” in paragraph 19(1).
[9] In R & Commrs v Tooth [2019] BTC 14, the Court of Appeal held that where a person had submitted a tax return which contained an inaccuracy which he knew was an inaccuracy, the return could be said to contain a deliberate inaccuracy even though the taxpayer did not intend thereby to bring about an insufficiency of tax. That case related to the application of section 118(7) Taxes Management Act 1970 (“TMA”) which provided that for the purposes of TMA references to a loss of tax being brought about deliberately included a loss of tax “which arises as a result of a deliberate inaccuracy”. Paragraph 3(1)(c) Sch 24 defines an inaccuracy as “deliberate and concealed “if the inaccuracy is deliberate” on P's part and P makes arrangements to conceal it …”. It seems to us that there is no contextual difference which justifies a different approach to the words from that in Tooth. We regard a deliberate inaccuracy as an inaccuracy which the taxpayer knew was an inaccuracy when the relevant document was given to HMRC.
[10] Mrs Goldring argues that the correct approach to the meaning of “attributable” is that adopted by the FTT in Andrew [2016] TC 05068, where the FTT found that a deliberate inaccuracy could be attributed to Mr Andrew where “he did not take any meaningful steps to satisfy himself of the accuracy of the information before completing and signing the return” and held that that constituted recklessness which “was well established as sufficient for these purposes”, relying on Lord Hershell in Derry v Peek (1889) 14 AC 337. In that passage Lord Hershell had said that fraud was proven when a false representation was made: (1) knowingly or (2) without belief in its trust or (3) recklessly careless whether it be “true or false” although the third was but an instance of the second.
[11] Mrs Goldring also referred us to Farrow [2019] TC 07048 where the FTT asked itself whether there was evidence “to establish that the inaccuracy was attributable to the acts or omissions of the Appellant himself … and that [he] knew that his acts or omissions would bring about the [relevant inaccuracy]”.
[12] There is no definition of attributable in para 19 and it should bear its normal meaning. It seems to us that that meaning has something to do with having responsibility for something else, and, in the context of the attribution of a deliberate inaccuracy, carries with it a sense that the person to whom the action is attributed is in some way blameworthy. Where a person does something which causes an inaccuracy and causes it to be deliberate there is no doubt that the deliberate inaccuracy is attributable to him. Where he fails to do something, which failure permits the deliberate inaccuracy or does or fails to do something which permits it, the position is more nuanced, and in our view it is generally only where he knew or had a duty to know whether his action or inaction permitted the inaccuracy or the deliberation of its making that, as a matter of ordinary understanding, one would say that the inaccuracy was attributable to him. Thus we would confine the reckless described in Andrew and the knowledge described in Farrow to situations where the taxpayer had a duty to avoid inaccuracy.
[13] HMRC put their case on the basis that there was a supply of goods by KW – and thus an...
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