In Tandem Resources Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 08 October 2019 |
| Neutral Citation | [2019] UKFTT 615 (TC) |
| Date | 08 October 2019 |
| Court | First Tier Tribunal (Tax Chamber) |
[2019] UKFTT 615 (TC)
Judge Nigel Popplewell, Mr Mark Buffery
Mr Roger Purkiss, director of the Appellant, appeared for the appellant
Mr Keith Golder, litigator of the Respondents' Solicitor's Office, appeared for the respondents
Value added tax – Best judgement assessments – Supply of labour or outsourced payroll services – Held labour – Appeal against assessments dismissed – Penalties for inaccurate returns – Careless or deliberate – FA 2007, Sch. 24 – Held careless – Appeal against penalty assessment allowed in part.
The First-tier Tribunal (FTT) dismissed an appeal against assessments issued for supplies of labour, but accepted the inaccuracies contained in the appellants VAT returns were careless, rather than deliberate, and there were special circumstances that should have been taken into account. The FTT therefore reduced the penalty assessments allowing the appeal in part.
In Tandem identified employee benefits – principally pensions, well-being platforms and shopping discount vouchers – available to larger companies at a much lower cost than to smaller companies. They devised a business model that aggregated the employees from several participating smaller companies in the automotive and coach industries under the In Tandem banner and thus enabled the benefits to be accessed at the lower cost.
Employees of participating companies were transferred, under TUPE, to In Tandem. Following complex but standardised arrangements detailed in the decision, In Tandem provided what it considered to be outsourced payroll services and paid the appropriate income tax and national insurance contributions to HMRC. The transferred employees remained under the full control of the relevant participating company who also continued to pay net wages direct to each of them.
The payroll, pension, employee benefit and compliance services were invoiced, charging VAT which was paid to HMRC. The income tax and national insurance contributions paid by In Tandem were treated as disbursements and this was not disputed by HMRC. HMRC successfully contended however, as the sole employer of the transferred employees, In Tandem were supplying labour to each of the participating companies and the wage payments made by the participating companies should also be treated as consideration for that supply of labour and subject to VAT.
In the absence of full records an assessment of the VAT due in relation to this was made to HMRC's best judgement and, following the principles in Van Boeckel v C & E Commrs (1980) 1 BVC 378, this was upheld. In Tandem had not been able to provide any further information to suggest the amount assessed was too high.
An error in the accounting system, resulting from the use of American sales software, led to a proportion of the disbursements paid by In Tandem being reclaimed as input tax. These had already been corrected as part of an earlier Alternative Dispute Resolution.
It was further contended, by HMRC, both the under-declarations of output tax and over-declarations of input tax were deliberate and penalty assessments had been imposed.
The FTT noted the burden of proof to demonstrate any inaccuracies were deliberate was with HMRC and decided HMRC had not shown that to be the case in respect of either the output tax or the input tax although they conceded the latter was a much more finely balanced position.
The inaccuracies in the recovery of input tax were careless and should be penalised as such.
Finally, the FTT found the decision to restrict the discount applied to the penalties to 5% was flawed. It did not include any reduction for special circumstances but the company accounting records had been sabotaged by the person who originally designed them, and this was clearly out of the ordinary run of events. The FTT allowed a further 20% discount to be applied.
The overall percentage to be applied to the calculation of penalties was reduced from 68.25% to 26.25%.
This decision, in relation to the nature of the supplies and the value of the consideration received, is not surprising given the contractual arrangements put in place and the clear reflection of these in the day to day measures adopted by the parties involved.
It does, however, represent another recent case where HMRC have been unable to sustain a penalty assessment for deliberate inaccuracy – see also Hussain [2019] TC 07325 – demonstrating the very significant burden of proof under which they are required to operate.
[1] This is a VAT case which concerns assessments (the “assessments”) for underpaid VAT (both underpaid output tax and over recovered input tax) and penalties for inaccuracies in VAT returns.
[2] The central issue is whether the appellant (the “Company” or “In Tandem”) supplied labour to its customers as the respondents (or “HMRC”) contend, or outsourced administration services (as the Company contends).
[3] The amounts in question are large. The specific amounts assessed which were the subject matter of the original appeal are for VAT of £9,199,978 (over recovered input tax of £4,140,589 and under declared output tax of £5,059,396) together with interest of £446,172.09. These relate to tax returns for the period 27 June 2012 to 29 November 2016. But further assessments have been made since the appeal (the one of which we are aware is dated 8 March 2017 and is for £2,262,356 of VAT). There is also interest on that of £412,186.16. We are told there are others. The parties agree that this decision and the reasons for it will apply equally to any other assessments for VAT and interest which have been visited on the appellant.
[4] The same goes for penalties. The appellant has been assessed to a penalty of £6,278,989.85 for deliberate inaccuracies in its VAT returns. HMRC now accept that that amount is overstated and should be £4,157,139.55.
[5] We were told that the total amount of VAT interest and penalties which might be affected by this decision is more than £20 million.
[6] Furthermore, it is HMRC's intention (in their pleadings they say they have already done this but that turns out not to be the case) to make Mr Purkiss personally liable to pay the penalties under paragraph 19 of Schedule 24 of the Finance Act 2007 (“Schedule 24”).
[7] So there are five issues before us:
- What was the nature of the supplies which were made by In Tandem to its customers?
- Which is the VATable consideration for those supplies?
- Were the assessments made to HMRC's best judgment?
- Did the assessments overcharge the appellant and if so, what is the amount of that overcharge?
- If the supplies were of labour and so the relevant VAT returns were inaccurate, were those inaccuracies deliberate, careless or just simple errors?
[8] For the reasons given later in this decision we have come to the conclusion that:
- The Company supplied labour to its customers.
- The VATable consideration included the wages paid by the customers to the employees
- The assessments were made to best judgment;
- The assessments do not overcharge the appellant.
- The inaccuracies in the returns were a result of careless and not deliberate behaviour on the part of the Company.
[9] Finally, the Company has accepted that the assessments are accurate insofar as they relate to any over recovered input tax. So it accepts that, subject to the assessments being made to best judgment, it is liable to pay those elements of the assessments which relate to over recovered input tax. However the Company maintains its position regarding penalties and says that the over recovered input tax was a result of careless and not deliberate behaviour.
[10] We were provided with bundles of documents. Mr Purkiss gave oral evidence at the February 2019 hearing on which he was cross examined by Mr Golder. Oral evidence was given for HMRC by Officer Suzanne Roberts of HMRC's Fraud Investigation Unit. The evidence can be conveniently broken down into two parts: that relating to the supplies made by In Tandem; and that relating to the penalties.
[11] Although we set out the relevant law in more detail later in this decision, it is worth saying now that one of the crucial aspects of these type of cases concerns the contractual relationship between the relevant parties (in this case between In Tandem and its customers). Prior to the hearing in February 2019 we were provided with 12 such contracts (the “contracts”) entered into by the appellant and various of its customers between September 2012 and September 2015. These contracts are in identical form save as to the parties and the dates. At the hearing in February 2019 Mr Purkiss gave evidence about these contracts. We found him to be an honest and reliable witness. He recognised that the strategy which the Company had adopted (detailed below) may have had unforeseen and unfortunate VAT consequences, but he accepted that might be the case. He did not try, in our view, to tailor his evidence to better his case.
[12] From this evidence we find the following as facts:
- (1) The Company was incorporated and registered for VAT in June 2012. It described its intended business activities as the provision of staff.
- (2) In Tandem was the brainchild of Mr Purkiss. It was he who conceived its business model. However the accounting package used by the Company was designed by John Davies (Mr Davies) a former associate of Mr Purkiss. The accounting package was cloud-based with support provided from the USA where Mr Purkiss lived, and from India.
- (3) Mr Purkiss had spotted that larger companies (i.e. those with significant (in the thousands) number of employees) were far better placed to obtain benefits for its employees at a lower cost than employers with fewer employees. He thought that if he could aggregate employees from a number of employers under the In Tandem banner, In Tandem could then obtain...
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