Value Added Tax; Misdeclaration Penalty; Mitigation; Value Added Tax 1994 Sections 63 and 70

19119

Value Added Tax; Misdeclaration Penalty; mitigation; Value Added Tax 1994 sections 63 and 70.

EDINBURGH TRIBUNAL CENTRE

AYR PAVILION LTDAppellant

- and -

HER MAJESTY’S REVENUE & CUSTOMS Respondents

Tribunal: (Chairman): J Gordon Reid, QC., F.C.I.Arb.,

(Member): Dr Heidi Poon, CA., CTA

Sitting in Edinburgh on Monday 16 May 2005

for the AppellantMr David Paton

for the RespondentsMr A McCue

© CROWN COPYRIGHT 2005.

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DECISION

This appeal relates to the question of mitigation of a penalty imposed by the Respondents (Customs) under section 63 of the Value Added Tax 1994. There are, per incuriam, two appeals before us. One concerned a Notice of Assessment dated 20/4/04 in the sum of £26,118.00 plus interest but there was no appeal against the related Misdeclaration Penalty of £3,917, imposed by Notice of Assessment dated 6/5/04. The other appeal related to both assessments. Why two appeals were lodged and why they were both allowed to proceed is not clear. However, at the Hearing at Edinburgh on 16/5/05, parties agreed that both appeals should be disposed of together, that the appeal against the Assessment dated 20/4/04 had, in effect, been abandoned and that the only issue before the Tribunal was the exercise of our discretion in relation to the question of mitigation of the Misdeclaration Penalty.

The Appellant was represented by Mr David Paton, a retired Chartered Accountant, who is the Appellant’s Company Secretary. He also gave evidence. Customs were represented by Mr A McCue, a senior and experienced Customs Official. He led the evidence of Mrs Irene Parkes, an Appeals and Reconsideration Officer. Mr McCue produced a file of papers containing various items of correspondence and other documents, including the penalty calculations made under section 63 of the 1994 Act. There was little dispute about the facts which we find as follows:-

Facts

1. The Appellant is, in effect, owned by Mr Paton and his family. He is the Company Secretary and his daughter-in-law is a Director. The Appellant carries on business as a property investment company. Its principal and only substantial asset is the Ayr Pavilion, a prominent listed building in Ayr, which it purchased in about December 2000.

2. At some point in 2001, the Appellant entered into a lease of the Ayr Pavilion with a company known as Pirate Pete’s Ltd (“PPL”). That company, although owned by the Paton family, was managed by non family members. Mr Paton was the Company Secretary of PPL and his son was a Director. PPL carried on business there from about September 2001 as a children’s play centre. It was registered for the purposes of VAT. The Pavilion was refurbished at a cost of over £500,000. The interior was designed as a pirate ship. The centre was available for hire for children’s parties and was also generally available for entertaining children either in groups or individually. Business was not good and by November 2002, PPL had accumulated losses of about £45,000 and had paid no rent to the Appellant. The rent arrears amounted to £45,333.

3. In November 2002, the Managing Director of PPL (who was not a member of the Paton family) was, for various reasons, asked by them to resign. He did so. The lease was irritated. PPL ceased trading on or about 17/11/02. The premises were closed for about three days then re-opened by the Appellant who carried on the same business previously carried on by PPL. PPL was insolvent; it had been poorly managed. It went into liquidation but the interim liquidator has withdrawn as the company has no assets. It is likely that it will simply be struck off the Register of Companies.

4. On 20/11/02 PPL sold its fixed assets, play equipment, furniture, fittings, catering equipment, accounting machines and its plant and machinery to the Appellant for £149,245 plus VAT of £26,118. Mr Paton prepared and issued an invoice in these sums. The Appellant also took over a substantial hire purchase liability of PPL as well as whatever goodwill PPL had to offer – essentially existing bookings. PPL transferred its business as a going concern to the Appellant. PPL was subsequently de-registered with effect from 18/11/02. It did not account to Customs for the output tax on that invoice.

5. On 16/6/03, the Appellant submitted an application to register for VAT. The application, signed by Mr Paton, acknowledged that the Appellant had taken over the business of PPL as a going concern and declared that it had made its first taxable supply on 22/11/02. The Appellant was, on 20/6/03, registered with effect from 18/11/02.

6. In its first return, rendered late on or about 7/11/03, for the period 22/11/02 to 30/9/03 the Appellant claimed the said sum of £26,118 as input tax. Following a visit to inspect the Appellant’s books and records, a Notice of Assessment in that sum was issued on or about 20/4/04 on the basis that the foregoing transfer of PPL’s business was not a taxable supply. A Notice of Assessment of Misdeclaration Penalty in the sum of £3,917 was subsequently issued on or about 6/5/04. That penalty has been correctly calculated. At the Appellant’s request, these assessments were reconsidered. By letter dated 14/6/04, Mrs Parkes confirmed the assessments.

7. The pavilion was leased to a third party in about November 2004.

8. At no stage did the Appellant seek guidance from Customs (which was available and would have been given if sought) on the VAT consequences of the events in November 2002.

Discussion and Conclusions

Mr McCue submitted that it was questionable whether there was any room for mitigation in this appeal. PPL had been badly managed and the Paton family, although not involved directly in the day to day running of PPL were responsible for its VAT affairs. Mr Paton prepared the invoice dated 20/11/02. He prepared the application for registration on behalf of the Appellant and acknowledged that PPL’s business was being transferred as a going concern. The invoice was invalid as by its date PPL had been de-registered. While there may have been a genuine misunderstanding as to what a “going concern” meant, the Appellant could readily have discussed the matter with Customs. They did not do so. Any mitigation should not exceed about 25%.

Mr Paton pointed out, correctly, that at the end of the day, there will, once the input tax deducted is repaid to Customs, be no loss of revenue. There were funds available which had been earmarked for payment to Customs and he had undertaken to pay the assessment in full. The basis of this undertaking was not entirely clear to us. He had genuinely misunderstood what transfer of a going concern meant for VAT purposes. Although he had been a partner in a large firm of accountants, VAT was not his field and he was not as sharp as he used to be on accounting matters. He retired fro practice in about 1993. We are, of course, aware that we are not entitled to take into account the fact that the Appellant or any person acting on its behalf has acted in good faith (VATA 1994 section 70(4)(c)). He suggested there should be mitigation to the extent of 50%.

We were impressed by Mr Paton’s frank and honest attitude at the Hearing. We were also impressed by the fair and restrained approach of Mrs Parkes in evidence and by Mr McCue in the presentation of Customs’ position. Mrs Parkes accepted that if it had been represented to her that there had been a genuine misunderstanding of the law then some mitigation might have been made.

With some hesitation, we are prepared to exercise the broad discretion conferred on us by section 70(1) of the 1994 Act. In exercising our discretion we do not take into account any of the matters specified in section 70(4). Rather, we base our views on the somewhat unusual background circumstances, including the Appellant’s apparent misunderstanding of what is a going concern for VAT purposes. We refer, in that respect, to section 49 of the 1994 Act. In this area, each case is confined to its own particular facts and circumstances and cannot constitute a precedent for future appeals. In our view, it is proper, in all the relevant circumstances, that a modest reduction in the penalty should be made. We agree with Mr McCue that it should be no more than about 25%. We shall therefore reduce the Notice of Assessment of Misdeclaration Penalty dated 6/5/04 from £3,917 to the sum of THREE THOUSAND POUNDS STERLING (£3,000).

Unless either party makes submissions on the question of expenses within twenty eight days of the date of the release of this decision, no expenses will be deemed to have been found due to or by either party.

J GORDON REID, QC., F.C.I.Arb.,

CHAIRMAN

RELEASE:

EDN/04/87

EDN/04/103

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