R & C Commissioners v Donnelly
| Jurisdiction | UK Non-devolved |
| Judgment Date | 26 November 2021 |
| Neutral Citation | [2021] UKUT 296 (TCC) |
| Court | Upper Tribunal (Tax and Chancery Chamber) |
[2021] UKUT 296 (TCC)
Upper Tribunal (Tax and Chancery Chamber)
Mr Justice Miles, Judge Jonathan Richards
James Puzey and Jenny Goldring instructed by The General Counsel and Solicitor for Her Majesty's Revenue and Customs appeared for the appellants
Etienne Wong, instructed by DLS Law appeared for the respondent
Value added tax – Penalty – Personal liability notice – Whether FTT erred by deciding that HMRC had failed to prove the amount of the penalty – Yes – As the relevant matter was not in dispute – Appeal allowed.
The UT allowed HMRC's appeal against an FTT decision a personal liability notice could not be enforced because HMRC had failed to prove that a penalty was due.
Donnelly was sole director of a company, “Korum”. HMRC had assessed Korum to recover input tax incurred on purchases of alcohol. HMRC argued that the purchases were connected to the fraudulent evasion of VAT and that the input tax was irrecoverable on Kittel grounds. In addition to issuing an assessment for overclaimed input tax, HMRC issued a penalty assessment set at 100% of the potential lost revenue because the misstatement on the company's VAT returns was both deliberate and concealed. The overclaimed input tax was just under £400k. A personal liability notice in respect of this penalty was issued to Mr Donnelly.
Mr Donnelly appealed to the FTT [2019] TC 07430. The FTT allowed his appeal. It concluded that there was no evidence before it that the supplies of alcohol had, in fact, taken place. The FTT reasoned that, in the absence of a supply, there was no potential lost revenue and therefore any penalty based upon potential lost revenue was nil.
HMRC appealed the FTT's decision on the ground that it was common ground between the parties that the supplies in question had taken place. It was therefore wrong of the FTT to have first, allocated HMRC the burden of proving that the supplies had been made and, second, find that HMRC had not discharged this burden of proof (para. 28).
The UT concluded that, in an adversarial system, it was for the parties to determine which matters of fact and law they wished to contest and that it was for the tribunal to determine those contested matters. The tribunal's job was not to determine agreed facts or to place an onus on one party to prove an agreed fact (para. 33). The UT pointed out that, before the FTT, neither HMRC nor Mr Donnelly had argued that the supplies did not exist. In fact, in his evidence to the FTT Mr Donnelly had accepted that the supplies had occurred (see e.g. para. 22).
The UT set the FTT's decision aside with the outcome that Mr Donnelly's appeal against the penalty liability notice is dismissed.
HMRC had advanced other grounds of appeal but, in view of its decision on the ground above, it was not necessary for the UT to consider them.
The UT's decision is unsurprising. The FTT's decision was based upon its determination that HMRC had not demonstrated that the supplies in question had taken place, despite the fact that it was common ground between the parties that the supplies had taken place.
[1] Korum Wholesale Limited (“Korum”) claimed credit for input tax said to have been incurred on purchases of 11 consignments of alcohol. It issued VAT invoices to its customer relating to averred supplies of the same alcohol. The FTT found that, by application of the principle in Kittel v Belgium; Belgium v Recolta Recycling SPRL (Joined Cases C-439/04 and C-440/04) [2008] BVC 559, Korum was not entitled to input credit on its purchases. HMRC sought a penalty under the provisions of Schedule 24 of the Finance Act 2007, recoverable from the appellant, Mr Donnelly, in his capacity as a director of Korum, for the inaccuracies in Korum's VAT returns.
[2] In a decision (the “Decision”) reported as Donnelly [2019] TC 07430, the FTT concluded that, in principle, Mr Donnelly was liable for a penalty. However, it considered that the amount of penalty payable would depend on whether the supplies of the alcohol had actually taken place. If the supplies had taken place, the penalty would be properly charged at £379,864.98. However, if there had been no such supplies the penalty would be nil because, applying paragraph 6 of Schedule 24, the inaccuracy (in Korum's favour) consisting of Korum's overclaim of input tax would be cancelled out by an overstatement (in HMRC's favour) of the amount of output tax due on Korum's sales of the alcohol which had not taken place. There was a dispute as to the precise basis on which the FTT reached its conclusion which we will not determine in these introductory remarks. However, in essence, the FTT concluded that it was not satisfied that goods had been supplied, that accordingly HMRC had failed to establish that a penalty of £379,864.98 was properly payable and so allowed Mr Donnelly's appeal.
[3] HMRC's appeal raises the question whether the FTT was entitled to make that decision in circumstances where both parties had been proceeding on the basis that the supplies of the alcohol had indeed taken place.
[4] The penalties in dispute are chargeable pursuant to the provisions of Schedule 24 of the Finance Act 2007 (“Schedule 24”). Paragraph 1 of Schedule 24 provides that a person (described as “P”) is liable to a penalty if, among other matters, P submits a VAT return that contains an “inaccuracy” including an excessive claim for input tax credit. Where a penalty becomes payable pursuant to paragraph 1 of Schedule 24, the amount of that penalty is fixed by determining the appropriate penalty percentage and applying it to the amount of “potential lost revenue”.
[5] Paragraph 4 of Schedule 24 makes provision for a sliding scale of penalty percentage depending, among other matters, on whether the inaccuracy is “careless”, “deliberate” or “deliberate and concealed”. It is common ground that paragraph 4 of Schedule 24 produces a penalty percentage of 100% in the circumstances of this case which, as the FTT found, involved “deliberate and concealed” behaviour in the context of a purely domestic matter.
[6] The penalty percentage must be applied to “potential lost revenue” which is calculated under rules set out in paragraphs 5 and 6 of Schedule 24 which provide, so far as material, as follows:
(1) “The potential lost revenue” in respect of an inaccuracy in a document (including an inaccuracy attributable to a supply of false information or withholding of information) or a failure to notify an under-assessment is the additional amount due or payable in respect of tax as a result of correcting the inaccuracy or assessment.
(2) The reference in sub-paragraph (1) to the additional amount due or payable includes a reference to–
- an amount payable to HMRC having been erroneously paid by way of repayment of tax, and
- an amount which would have been repayable by HMRC had the inaccuracy or assessment not been corrected.…
…
(2) In calculating potential lost revenue where P is liable to a penalty under paragraph 1 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 sub-paragraph (2)–
- understatement means an inaccuracy that satisfies Condition 1 of paragraph 1, and
- overstatement means an inaccuracy that does not satisfy that condition.
[7] Paragraph 6 was at the heart of the FTT's analysis. It...
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