[2013] UKFTT 324 (TC)
TC02727
Appeal number: TC/2011/01948
VAT – Penalties – Schedule
24 Finance Act 2007 – inaccuracies in VAT return – deliberate inaccuracy –
careless inaccuracy – reliance on agent – appeal allowed in part
FIRST-TIER TRIBUNAL
TAX CHAMBER
|
|
BILAL JAMIA
MOSQUE
|
Appellant
|
|
|
|
|
|
|
- and -
|
|
|
|
|
|
|
|
THE
COMMISSIONERS FOR HER MAJESTY’S
|
Respondents
|
|
|
REVENUE &
CUSTOMS
|
|
|
TRIBUNAL:
|
JUDGE JONATHAN CANNAN
|
|
|
MR DEREK ROBERTSON
|
Sitting in public in Manchester on 18 March 2013
Mr Philip Rayner of Portcullis
VAT Consultancy appeared for the Appellant
Mr William Brooke of HM
Revenue & Customs appeared for the Respondents
© CROWN COPYRIGHT
2013
DECISION
Background
1.
The appellant is the Bilal Jamia Mosque, or more correctly the members
of the management committee who administer the mosque. The full name under
which they are registered for VAT purposes is Bilal Jamia Masjid and Islamic
Teaching Centre.
2.
In October 2007 the appellant applied to be registered for VAT and was
registered with effect from 2 March 2006. The appellant made its first VAT
return for the period 2 March 2006 to 30 April 2008 (“the 04/08 Return”) on 30
May 2008. The 04/08 Return showed no supplies and claimed an input tax
repayment of £36,747.35. The claim related to input tax on the costs of
constructing the mosque. Following a period of verification which we describe
in more detail below the repayment was refused.
3.
On 26 May 2010 the appellant made a return for the period 1 February
2010 to 30 April 2010 (“the 04/10 Return”). That return also showed no supplies
and claimed an input tax repayment of £42,214.00. It is not disputed that the
input tax claimed in the 04/10 Return included the same input tax which had
been refused in the 04/08 Return. Further, the appellant accepts that the 04/10
Return contained an inaccuracy and was correctly reduced by HMRC to nil.
4.
An officer considered that the appellant had deliberately made an
inaccurate claim for repayment of tax in the 04/10 Return and assessed a
penalty pursuant to Schedule 24 Finance Act 2007. The penalty was
notified to the appellant on 18 February 2011 and is in the sum of £20,684.86.
The appellant appeals against that penalty.
5.
We set out below the relevant statutory provisions which govern the
assessment of penalties for errors in tax returns including VAT returns. We
also consider various statutory provisions relevant to the input tax claims. We
then set out our relevant findings of fact based on the evidence before us and
our decision on the appeal.
Statutory Provisions -
Penalties
6.
The following references are to the penalty regime in place in May 2010
when the 04/10 Return was made. Save where otherwise noted references are to Schedule
24 Finance Act 2007.
7.
Paragraph 1(1)(a) provides that a penalty is payable where the taxpayer
gives HMRC a VAT return and two conditions are satisfied. The first condition for
present purposes is that the document contains an inaccuracy which amounts to
an inflated claim to repayment of tax. The second condition is that the inaccuracy
was careless or deliberate.
8.
Paragraph 3(1)(a) provides that an inaccuracy in a document is
"careless" if “the inaccuracy is due to failure by [the taxpayer]
to take reasonable care”. It also distinguishes inaccuracies
which are “deliberate but not concealed” and “deliberate and concealed”. It is
not suggested by HMRC that the inaccuracy in the present case was concealed.
9.
Paragraph 4(1)(a) sets the penalty for careless action at 30% of the
potential lost revenue ("PLR"). The penalty for deliberate but not
concealed action is 70% of the PLR.
10.
Paragraph 5 defines the PLR as follows:
“(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 …
(2) The
reference in sub-paragraph (1) to the additional amount due or payable includes
a reference to –
(a) …
(b) an
amount which would have been repayable by HMRC had the inaccuracy … not been
corrected.”
11.
There are specific provisions which define PLR in cases of multiple
errors in a return where the calculation of PLR depends on the order in which
the errors are corrected; where a loss is wrongly recorded; and where an
inaccuracy results in an amount of tax being declared later than it should have
been.
12.
Paragraphs 9 and 10 permit reductions in penalties where a person
discloses an inaccuracy. Disclosure in this context is defined as:
“(a) telling HMRC about it,
(b) giving HMRC reasonable help in quantifying the
inaccuracy…, and
(c) allowing HMRC access to records for the
purpose of ensuring that the inaccuracy … is fully corrected.”
13.
Schedule 24 also distinguishes an “unprompted” disclosure and a
“prompted” disclosure. A disclosure is unprompted if made at a time when the
person making it has no reason to believe that HMRC have discovered or are
about to discover the inaccuracy. Otherwise a disclosure is prompted.
14.
Paragraph 10 sets out the reductions which HMRC shall apply to a penalty
which for present purposes will depend on whether any penalty is a 30% penalty
for a careless inaccuracy or a 70% penalty for a deliberate but not concealed
inaccuracy. The reduction which HMRC must apply will depend on whether the
disclosure was prompted or unprompted. It must also reflect the “quality”
of the disclosure. Paragraph 9 defines the quality of a disclosure as including
“timing, nature and extent”.
15.
Paragraph 11 permits HMRC to reduce a penalty generally “if they
think it right because of special circumstances”. Paragraph
14 permits HMRC to suspend all or part of a penalty for a careless inaccuracy.
16.
Paragraph 18 makes provision for the liability of a taxpayer to
penalties pursuant to Schedule 24 where agents are acting on behalf of the
taxpayer. It provides as follows:
“(1) P is liable under
paragraph 1(1)(a) where a document which contains a careless inaccuracy (within
the meaning of paragraph 3) is given to HMRC on P’s behalf.
…
(3) Despite
sub-paragraphs (1) and (2), P is not liable to a penalty under paragraph 1 or 2
in respect of anything done or omitted by P’s agent where P satisfies HMRC that
P took reasonable care to avoid inaccuracy (in relation to paragraph 1)…”
17.
Paragraphs 15 to 17 set out the rights of appeal in respect of penalties
and where relevant the refusal of a suspension. The tribunal has jurisdiction
to affirm or cancel HMRC’s decision that a penalty is payable. It may also
affirm HMRC’s decision as to the amount of any penalty payable, or substitute
another decision which HMRC would have had power to make. The tribunal’s
jurisdiction to reduce a penalty because of special circumstances or to suspend
a penalty in circumstances where HMRC’s decision on those matters is challenged
is restricted to cases where HMRC’s decision is “flawed”.
Statutory Provisions - VAT
18.
In the present appeal there is no challenge to the underlying decision
of HMRC to refuse the repayment claim made in the 04/10 Return. It is necessary
however to say something about the statutory provisions which would be relevant
to support a claim to repayment of input tax on construction costs. We were not
addressed in detail in relation to these provisions and it is fair to say that
the VAT treatment of land and buildings is not straightforward. The following
is an outline of the position in so far as it is relevant to the issues on this
appeal. There are two separate regimes to which we must refer:
(1)
Recovery of input tax by VAT registered traders, and
(2)
Recovery of input tax by “DIY Builders”.
Registered Traders
19.
Generally, where a trader is registered for VAT it can reclaim the input
tax incurred on the cost of constructing a building to be used for the purposes
of its business. However the input tax would be wholly irrecoverable if the
business makes only exempt supplies and may be restricted if the business is
partially exempt.
20.
Where the business to be carried on will involve granting licences to
occupy the building under construction then in the ordinary course that would
be an exempt supply by virtue of Group 1 Schedule 9 VATA 1994. However
the business can opt to tax the land for VAT purposes pursuant to Schedule
10 VATA 1994. This has the effect of excluding exemption so that supplies
of licences to use the building will be standard rated.
21.
There are two separate steps involved in opting to tax land. Firstly the
trader must exercise the option. Secondly the trader must notify the option to
HMRC. The earliest date on which an option to tax can take effect is the date
on which it is exercised. Where an option to tax is exercised but not notified
to HMRC within 30 days, HMRC has a discretion to accept the notification from
the date of the option. Whether or not it does so will depend on the
circumstances.
22.
In certain circumstances permission from HMRC is required before a
trader can opt to tax. In particular where a trader has made exempt supplies
from the land in the 10 years prior to the date on which the option to tax is
to take effect. In certain circumstances automatic permission is granted where
the conditions set out in Notice 742A are satisfied. The requirement for
permission is to be distinguished from the discretion which arises where a
belated notification is made.
23.
Where an option to tax is effective, input tax on the cost of
constructing a building would be recoverable or partially recoverable depending
on the nature of the supplies to be made by the business from the building.
24.
Specific considerations arise in relation to the recovery of input tax
by places of worship. Any business activity is usually incidental to the main
non-business purpose of providing a place of worship. In the case of cathedrals
and churches HMRC has an informal banding system depending on activities taking
place in the building. There are four bands, A to D. Band A represents
buildings such as St Paul’s Cathedral where there are significant admission
charges and 90% input tax recovery is permitted. Band D represents churches
where there are no admission charges, only a small number of visitors and
little taxable income. 25% input tax recovery is permitted.
DIY Builders
25.
Section 35 VATA 1994 makes provision for what is known as “the DIY
Builders Scheme”. It is a special VAT refund provision which is designed to put
DIY builders in a broadly similar position to developers constructing and
selling zero rated properties. Under the scheme HMRC must refund VAT charged on
the supply of goods used in connection with the construction work subject to
certain conditions. Generally the scheme is used in relation to the
construction of dwellings or in relation to buildings to be used solely for a
“relevant charitable purpose”.
26.
HMRC has treated a building as being used solely for a relevant
charitable purpose where 90% of the use was for such a purpose. Extra Statutory
Concession 3.29 provided that “the non-qualifying use of a building can be
ignored if the entire building will be used solely for a qualifying purpose by
90% or more of the people using the building”.
27.
With effect from July 2010 the concession was withdrawn and HMRC
replaced it with a practice that effectively used a 95% test. HMRC accept that many
places of worship are seen as involving non-business use for these purposes and
as being used solely for a relevant charitable purpose.
28.
Regulation 201 Value Added Tax Regulations 1995 requires a claim under
the DIY Builders Scheme to be made no later than 3 months after the completion
of the building. The claim must include evidence of completion, for example a
certificate from the local authority.
Findings of Fact
29.
During the hearing we heard evidence from Ms Julie Lyddon, the officer
of HMRC who carried out verification of the 04/10 Return and who took the
decision to assess the penalty. On behalf of the appellant we heard evidence
from Mr Mushtaq Ahmad, who is the vice-chairman of the management committee and
had responsibility for construction matters. We also heard evidence from Mr
Mohammad Safdar who is an accountant acting on behalf the management committee.
We had before us documentary evidence provided by both parties. Based on the
evidence we make the following findings of fact.
30.
In 1988 a group of individuals formed to consider the possibility of
building a mosque in Rochdale. At that time there was only a small mosque with
capacity for 100 people. Donations were sought and in due course a suitable
piece of land was purchased and cleared. Originally a portable cabin was used
but by 1998 there were sufficient funds to commence building work. To date some
£2½ million has been raised by way of small individual donations. We understand
that the mosque is now in the latter stages of completion, although it is already
in use and has been for some years. It is estimated that another £½ million of
works are required to complete the mosque.
31.
The management committee of the mosque comprises 4 people and includes
Mr Ahmad who is the vice chairman and in 2010 was the acting chairman, Mr Aftab
Khan the treasurer, and Mr Ghalib Hussain the secretary. In Mr Ahmad’s words
they are “just ordinary people” with no particular business experience. He
himself is a driving instructor.
32.
The mosque is not only a place of worship but also provides an important
resource locally giving the opportunity for children to attend classes and
providing a venue for community meetings. It has always been the intention of
the committee to hire part of the building for catering at funerals, marriages
and other ceremonies and events. To date no such supplies have been made
because the kitchen and the toilet facilities are yet to be finished.
33.
Mr Safdar has acted as an accountant to the management committee since
January 2007. He has no other connection with the mosque. He practises as an
accountant under the name M Safdar & Co Accountants. He has a Batchelor of
Commerce degree and includes on his letterhead the letters AICA, although when
asked he did not know what those letters stand for. He described them as a
“small diploma”. In the light of the intended use of the mosque Mr Safdar
advised the committee in 2007 that they should become registered for VAT.
34.
The application for registration was signed by Mr Ghalid Hussain and
lodged with HMRC on or about 24 November 2007. Mr Safdar suggested that the
issue of an option to tax arose at this time although we have no other evidence
to this effect. It is likely that the issue would have arisen but we cannot
make any findings as to what was discussed or how matters were left. In any
event the appellant was registered for VAT with effect from 2 March 2006.
35.
The 04/08 Return was completed by Mr Safdar and signed by Mr Khan. The
claim for repayment in the 04/08 Return included construction costs of building
the mosque. The return was selected for verification by HMRC and Mr K Sanders,
an officer of HMRC, visited the mosque on 3 July 2008. We were provided with a
copy of Mr Sanders handwritten notes of that visit but we were told that
nothing turns on those notes. Mr Safdar and Mr Khan, the treasurer of the management
committee were present at that meeting. Mr Khan took primary responsibility for
VAT matters.
36.
Following his visit Mr Sanders wrote a letter addressed to the mosque
setting out his concerns that the input tax claimed was irrecoverable because
there was no business activity taking place. He referred to the possibility
that where some business activity takes place at a religious building, for
example the sale of books or where there are admission charges, then some input
tax relating to repairs and general maintenance may be recoverable. He asked
for confirmation as to what items might be sold from the building when fully
open and whether community users would be charged.
37.
Mr Safdar replied by letter dated 1 August 2008. He stated that once the
building was complete there was a hall which would be available for hire for
weddings and other social purposes. Books, magazines and periodicals would also
be sold at the mosque.
38.
On 12 August 2008 a Mr Mallinson replied in the absence of Mr Sanders.
He stated that the matter was clearly complex and had been referred to the HMRC
policy team. He also said that “the concern expressed by my colleague is not
whether or not VAT can be recovered but to what extent VAT can be recovered”.
39.
On 3 September 2008 Mr Sanders sent a comprehensive letter to Mr Safdar
having taken advice from the relevant policy team. He identified “two options”
as follows:
(1)
The mosque could remain registered for VAT in which case some input tax
recovery would be allowed. The input tax which was incurred during the
construction of the mosque would be split between the business and non-business
use made of the whole building. Identifying a fair and reasonable split between
business and non-business use may not be easy. The primary use of the mosque
would be for worship. Education services would probably be exempt from VAT. Sale of books, room hire and catering would probably be taxable. HMRC had an agreement
with a body representing churches of the United Kingdom giving a fixed
percentage input tax recovery depending on the nature of the church with 4
possible bandings, A-D which he went on to explain. Mr Sanders indicated that
in his view the same bandings could be applied to mosques and that the mosque
would fall into band D allowing 25% input tax recovery.
(2)
Alternatively, the mosque could de-register and would probably be able
to claim a refund of VAT pursuant to the DIY Builders Scheme. Buildings which
are constructed for a charitable purpose can be zero rated for VAT and once the
mosque was fully open extra-statutory concession 3.29 would probably apply.
This provides that business use can be ignored if the building will be used
solely for a charitable purpose by 90% or more of the people using the
building. Mr Sanders referred to the rules set out in Public Notice 719 (Refunds
for DIY Builders) and suggested that subject to those rules VAT on the cost of
building materials could be recovered. However it would be necessary for the
VAT registration of the mosque to be cancelled which would mean that it would
not be possible to reclaim input tax on future running costs, nor would VAT be
charged on supplies made.
40.
On 29 September 2008 Mr Sanders spoke to Mr Safdar and was informed that
the mosque intended to remain registered. On the same day Mr Sanders wrote to
Mr Safdar referring to the conversation, including reference to what appeared
to be an agreement that 65% of input tax would be treated as attributable to
business use. Mr Sanders asked Mr Safdar to confirm the position so that the
04/08 Return could be processed.
41.
There was no response from Mr Safdar or from the mosque and Mr Sanders
wrote on 28 October 2008 requesting written confirmation of the intention to
remain registered with input tax recovery on the construction costs and future
running costs being restricted to 65%. He stated that the 04/08 Return would
not be processed until confirmation was received at which stage 65% of the
claim amounting to £23,885 would be made.
42.
Mr Ahmad attended several meetings with other members of the management
committee and Mr Safdar in connection with the 04/08 Return. He saw some of the
correspondence but he had no real understanding of technical matters concerning
VAT. Any letters addressed to the mosque concerning VAT would go to Mr Khan. At
some stage, it is not clear when, Mr Safdar told the mosque committee that HMRC
would repay 65% of the VAT claimed. Mr Ahmad described this as “good news” but
that the mosque committee asked Mr Safdar to try and get 100%. Mr Safdar said
that he would try his best. Mr Ahmad’s understanding was that the 65% was
guaranteed and he was not aware that anything else was needed in order to
recover the 65%. As far as Mr Ahmad was concerned the mosque committee had
provided all the information necessary to Mr Safdar. They worked closely with Mr
Safdar and he gave the impression that he was fully on top of the situation.
They relied on Mr Safdar’s advice.
43.
Mr Safdar’s evidence was that when HMRC offered 65% of the claim the
management committee was not happy but could not make up their minds as to
whether they would forgo the other 35% or pursue the DIY Builders Scheme. Mr
Safdar said that he had difficulty getting instructions as to how to proceed
with the claim. We deal below with the apparent inconsistency between Mr
Ahmad’s evidence and that of Mr Safdar.
44.
There is no document from which to identify that Mr Sanders told Mr
Safdar that the mosque would have to make an option to tax the land before it
could reclaim input tax through its VAT return. We have not heard from Mr
Sanders, but we infer that he must have told Mr Safdar this was the case, or at
least satisfied himself that Mr Safdar was aware that it was necessary to opt
to tax.
45.
Some time in November 2008 HMRC received notification of an option to
tax the mosque, claiming to have been effective from 1 January 2003. Mr Safdar
helped in completing the form and it was signed by Mr Ghalib Hussain. The form indicated
an expected date for completion of the mosque as 31 December 2011. The HMRC
Option to Tax Unit wrote to the mosque on 27 November 2008 identifying that
notification of an option to tax must be made within 30 days of the decision to
opt to tax. Late notification is only accepted in certain circumstances and
HMRC requested evidence to confirm that certain conditions were satisfied.
46.
There was no reply from the mosque or from Mr Safdar to the letter dated
27 November 2008. Mr Safdar said that he had not seen this letter at the time and
we accept his evidence. Mr Ahmad also had not seen the letter and in any event
it was a technical letter and he accepted he would not have understood the
contents. It would have been given to Mr Khan on receipt. We find that Mr Khan
was aware of all the correspondence in 2008 and 2009.
47.
On 18 February 2009 Mr Sanders wrote to Mr Safdar asking for the
confirmation he had previously requested in his letter dated 28 October 2008.
He also stated that until the matters raised by the Option to Tax Unit in their
letter dated 27 November 2008 had been resolved and the option approved none of
the input tax claimed in the 04/08 Return would be paid. In the absence of a
reply Mr Sanders sent a further letter dated 13 March 2009 stating that unless
there was a response within 21 days the claim on the 04/08 Return would be reduced
to nil.
48.
There was no response. Mr Safdar said that this was because he could not
get instructions from the management committee. Again, this appears to be
inconsistent with Mr Ahmad who understood that the management committee had provided
everything Mr Safdar needed. This apparent conflict of evidence between Mr
Ahmad and Mr Safdar only arose during their oral evidence and it was not put as
such to either witness during the course of their evidence.
49.
It is unfortunate that we did not have any evidence from Mr Khan, who
was the treasurer and had responsibility for VAT matters. However, based on the
evidence we do have we find that Mr Safdar was dealing principally with Mr
Khan, as the treasurer. Mr Khan must have been aware, at least in 2009, that Mr
Safdar required further instructions to progress the claim. It seems likely
that Mr Ahmad was not aware that Mr Safdar was waiting for instructions from Mr
Khan.
50.
On 3 April 2009 Mr Sanders wrote to Mr Safdar stating that the repayment
claim on the 04/08 Return was rejected. Mr Sanders indicated that if the mosque
wished to remain registered then if the information required by the Option to
Tax Unit was provided and the option approved a voluntary disclosure could be
submitted reclaiming the input tax on construction costs. Alternatively if the
mosque wished to de-register to make a claim under the DIY Builders Scheme it
should contact HMRC’s registration unit. The rights of review and appeal were
set out in this letter. Another letter to the same effect was sent to the
mosque on 14 April 2009, copied to Mr Safdar.
51.
There was then no relevant contact between HMRC and the mosque or Mr
Safdar until the mosque submitted its 04/10 Return claiming a repayment of
£42,214. The submission of that return led to another verification exercise,
this time conducted by Ms Lyddon.
52.
Mr Safdar gave evidence as to the circumstances in which the 04/10
Return came to be made. In a witness statement made on 5 January 2012 Mr Safdar
stated that the management committee had told him that losing 35% of the claim
made in the 04/08 was unacceptable. In April 2010 the building work on the
mosque was nearly complete so he advised claiming the input tax on building
works again. He thought that if 65% of the input tax was claimed then this
might be reduced further. Instead, therefore he advised claiming 100% of the
input tax expecting HMRC to review and reduce the claim but in circumstances
where he could negotiate with HMRC. He knew that the claim would not be paid
without a visit from HMRC.
53.
In his oral evidence Mr Safdar stated that at the time of the 04/10
Return the management committee had decided to rely on the option to tax
because they did not know when construction of the mosque would be completed.
He also said in terms “I knew there was no way of getting 100%”. This
was because there would always be religious use of the building. However he
thought HMRC might offer more than 65% because the building was nearer
completion. We find it extraordinary in the light of his previous dealings with
Mr Sanders that Mr Safdar should advise claiming 100% of the input tax. However
we accept Mr Safdar’s evidence that this was the advice he gave. We also find
that Mr Khan and through him the appellant relied on Mr Safdar’s advice in
signing and submitting the 04/10 Return. Mr Safdar’s evidence demonstrates his confusion
as to the nature of the claim. He had no real understanding as to any basis
upon which HMRC might accept a claim greater than 65%.
54.
The 04/10 Return was completed by Mr Safdar and signed by Mr Khan. The
sum of £42,214 represented input tax incurred in building the mosque over the
period December 2003 to December 2009, including the period of the previous
claim.
55.
It is not clear on the evidence before us whether in May 2010, when the
04/10 Return was submitted, Mr Khan recalled that further instructions were
required to justify the claim to 65% of the input tax incurred. The most we can
say is that Mr Khan ought to have been aware that Mr Safdar required further
instructions. A moment’s thought and reference to the correspondence in 2008
and 2009 would have shown that the claim made in the 04/10 Return was not
justified until the option to tax was effective and he had no reason to believe
that it was effective in 2010.
56.
Mr Safdar stated in his witness statement that he did not know whether
he was making this claim under the option to tax scheme or any other scheme. He
stated that at the time he did not know there was a DIY Builders Scheme.
However he also stated that he had no intention of making a deliberately
incorrect return. In the end, following the visit of Ms Lyddon, Mr Safdar asked
Mr Rayner for help in relation to the verification. He had previously dealt
with Mr Rayner in relation to the VAT affairs of other clients. We accept Mr
Safdar’s evidence, however he certainly ought to have been aware of the DIY
Builders Scheme because it was referred to extensively in the correspondence
with Mr Sanders. Again, this illustrates Mr Safdar’s confusion.
57.
Mr Ahmad also gave evidence as to the circumstances in which the 04/10
Return came to be made and as to the verification meeting with Ms Lyddon. It
was clear to us, and Mr Ahmad accepted as much in his witness statement, that
he was confused as to the nature of the claim being made. Mr Ahmad suggests that
Ms Lyddon was confused, but we do not accept that.
58.
Mr Ahmad stated that the management committee never had any intention
other than to obtain whatever sum it was entitled to. His understanding was
that 65% of the claim was guaranteed. When the 04/10 Return was made claiming
100% of the input tax it was simply a request for HMRC to look kindly on the
charitable work of the mosque and to pay a bit more than the 65% that had been
offered. He considered that the mosque committee had been open and honest with
HMRC and was acting on the advice of Mr Safdar. No-one on the management
committee would derive any personal benefit from an incorrect return. Indeed he
said that the mosque was a building where honesty and truth are the first
things to be taught. Mr Safdar added that money collected for a mosque must be “pure
and earned by fair means”. There must be no question that funds were obtained
by cheating or deception.
59.
We accept Mr Ahmad’s evidence as to his understanding of the 04/10
Return and that the management committee did not intend to obtain more by way
of repayment than that to which they were entitled.
60.
Ms Lyddon visited the mosque on 13 December 2010. She met with Mr
Safdar, Mr Ahmad, Mr Khan and another gentleman. There was a discussion as to whether
the mosque would be entitled to reclaim the sums in the 04/10 Return, including
a discussion as to matters outstanding from the previous claim. The meeting
lasted some 2 hours. Ms Lyddon gave evidence to the effect that what she was
told at the meeting was inconsistent with the correspondence in connection with
the verification of the 04/08 Return. For example she understood that she was
being given a conflicting account as to the dealings between Mr Safdar and Mr
Sanders in 2008 and 2009. However, based on the evidence we have heard the most
we can be satisfied about is that there was a considerable amount of confusion
at this meeting on the part of the members of the mosque committee in
attendance and on the part of Mr Safdar. We are not satisfied that they
intentionally tried to mislead Ms Lyddon.
61.
Mr Safdar suggests in his evidence that Ms Lyddon was unhelpful and puts
this down to her lack of understanding. Ms Lyddon acknowledged during the
hearing that she was not an expert in the DIY Builders Scheme or in relation to
the option to tax. However we do not accept that Ms Lyddon was unhelpful or demonstrated
a lack of understanding in the enquiries made during her visit. She was aware
of the distinction between a repayment to a registered person who had exercised
an option to tax and a refund to an unregistered person through the DIY
Builders Scheme. During the course of the visit she was obtaining information
with a view to seeking specialist advice from HMRC policy teams. If Mr Safdar
gained the impression that Ms Lyddon was being unhelpful we put this down to
his own confusion as to the proper basis on which a claim to input tax might be
made.
62.
Matters were left that Ms Lyddon would check with various other HMRC
units before deciding how to progress the claim.
63.
Ms Lyddon spoke to Mr Safdar by telephone on 17 December 2010. It was
agreed that the repayment claim would be reduced to nil and the mosque would
submit a claim under the DIY Builders Scheme once the building works were
complete. She also set out the alternative that if the mosque proceeded with
the option to tax, the option would only be effective from the date the
notification was received in November 2008. Input tax incurred prior to November
2008 could not be reclaimed and input tax incurred after that date would be
apportioned.
64.
Ms Lyddon discussed the question of penalties with her manager. She considered
that when the 04/10 Return was submitted Mr Safdar knew that it was not
correct. On this basis she considered that the inaccuracy in the return arose
as a result of deliberate behaviour. She then went on to consider the
appropriate reduction for disclosure, bearing in mind that the maximum penalty
was 70% of the PLR and that this could not be reduced below 35% because the
disclosure was prompted. HMRC guidance in relation to penalties suggests the
maximum reductions to be given should be as follows:
(1)
30% for telling,
(2)
40% for helping, and
(3)
30% for access to the records.
65.
Ms Lyddon gave a reduction of 10% for telling. She did not give the full
30% reduction because she felt she had been misled at the visit on 13 December
2010. She gave a reduction of only 20% for helping because she felt that the
mosque committee and Mr Safdar could have been more helpful in quantifying the
inaccuracy. She gave the full 30% reduction for access to records. In total
these reductions equated to a 21% reduction from the maximum penalty of 70% so
that the penalty was 49% of the PLR. The PLR was £42,214 so the penalty imposed
was £20,684.
66.
Ms Lyddon also considered whether there were special circumstances to
justify a special reduction but concluded that there were not. We agree with
that aspect of Ms Lyddon’s decision and Mr Rayner did not seek to suggest that
there were any special circumstances.
67.
Mr Ahmad said that the mosque committee was shocked and very
disappointed when the penalty was assessed. We can understand that, given that
the basis of the penalty is deliberately making an inaccurate return which in
most cases would imply some dishonesty on the part of the trader.
Decision
68.
It is well established that the burden is on HMRC to satisfy us that a
penalty is chargeable, in particular that there is an inaccuracy in the return
and that the inaccuracy was either careless or deliberate. If we are so
satisfied, there is a burden on the appellant to establish that HMRC have
failed to reduce the penalty properly, have unreasonably failed to take into
account special circumstances or in the case of a careless penalty have
unreasonably failed to suspend the penalty.
69.
Mr Brooke accepted that the scope of our jurisdiction on this appeal
pursuant to paragraphs 15(1) and (2) Schedule 24 included the possibility we
might find that the inaccuracy was careless rather than deliberate and also
that we might take a different view as to the quality of the disclosure.
70.
Mr Rayner submitted that no penalty was due because there was no PLR. At
some point when the building of the mosque is completed the appellant will be
entitled to an input tax credit. There was never any danger of a loss of
revenue.
71.
We do not accept that submission. The appellant may well be entitled in
due course to reclaim some of the input tax which it claimed in the 04/10
Return. However it was not entitled to do so in the 04/10 Return. On any view
there was an additional amount repayable by HMRC had the inaccuracy not been
corrected. That amount is the PLR defined by paragraph 5. Paragraph 8 makes
provision for cases involving tax being declared later than it should have
been. However there is no provision whereby we can take into account the
possibility that the amount claimed would be repayable on a future return or if
the appellant were to de-register pursuant to a different statutory provision.
72.
The first issue for us to decide is whether the appellant deliberately made
an inaccurate return. Mr Rayner submitted that there was no deliberate or
dishonest attempt by the appellant to claim a repayment to which it was not
entitled.
73.
The test in Schedule 24 is not dishonesty unlike the provision in
section 60 VATA 1994 which it replaced for VAT purposes. Having said that a
taxpayer who deliberately makes an inaccurate return may well be acting
dishonestly. Deliberately making an inaccurate return must however involve
knowledge on the part of the taxpayer that the return contains an inaccuracy.
74.
We are conscious that the 04/10 Return was signed by Mr Khan. It was not
suggested that he was acting outside his authority in signing the return. We
are principally concerned therefore with the knowledge of Mr Khan. We have no
direct evidence as to the knowledge of Mr Khan because, as we have noted, he
did not give evidence. As to the management committee generally we have the
evidence of Mr Ahmad upon which we have made our findings of fact.
75.
We have accepted Mr Safdar’s evidence that he fully expected the 04/10
Return to result in a verification visit at which stage he intended to
negotiate with HMRC. We have also found that Mr Khan submitted the 04/10 Return
relying on Mr Safdar’s advice.
76.
Mr Rayner suggested when cross-examining Ms Lyddon that the
correspondence from Mr Sanders accepted that the mosque would be entitled to a
repayment of at least 65% of the input tax at some stage. He referred in
particular to Mr Mallinson’s letter dated 12 August 2008 which stated that the
issue was not whether VAT could be recovered but the extent to which VAT could
be recovered.
77.
In our view the correspondence as a whole made clear that repayment
through a VAT return would require an option to tax to be accepted by HMRC. The
appellant had failed to respond to the letter dated 27 November 2008 to give
the confirmations required by that letter. In those circumstances there was no
certainty that late notification of the option to tax would be accepted, and if
it was accepted from what date the option would be effective. Similarly, repayment
through the DIY Builders Scheme would be subject to cancellation of the
registration and compliance with rules in Public Notice 719.
78.
There are material differences between a claim for input tax repayment
through a VAT return and a claim under the DIY Builders Scheme. For present
purposes the most significant differences are as follows:
(1)
A claim through the VAT return can only be made by a registered person.
A claim under the DIY Builders Scheme can only be made by a non-registered person.
(2)
A claim through the VAT return can only be made in respect of input tax
which is attributable to taxable supplies in the course or furtherance of a
business. A claim under the DIY Builders Scheme can only be made where there is
no more than 5% (in 2008, 10%) business use.
(3)
A claim by a registered person must be made in the relevant VAT return
in which the input tax was incurred, subject to a voluntary disclosure within 4
years. A claim under the DIY Builders Scheme can only be made in the 3 months following
completion of the building.
79.
We have found that both Mr Safdar and the mosque committee were confused
as to the basis of the claim and we do not consider that they were fully aware
of the technical differences described above. However Mr Safdar was aware that
the claim could not be made until a choice had been made as to the route the
mosque wished to pursue to obtain a repayment. This was more than a mere
formality. One route involved only 65% recovery, the other route involved
possibly a greater recovery but with cancellation of the registration and no
recovery of VAT on future running costs.
80.
The appellant never implemented the steps required for either route to
repayment. The option to tax was not accepted. Mr Rayner relied on the
possibility of automatic permission but if the conditions for that to apply
were satisfied then Mr Rayner would no doubt have argued that some part of the
claim was wrongly refused. In the light of the appellant’s acceptance that the
claim was properly refused, no claim for repayment could properly be made
through a return. Even if the option to tax was automatic and did not require
permission it would only have been effective from the date the option was made.
81.
Building at the mosque is not yet complete. Mr Ahmad estimated that
another £½ million of works are required to complete the mosque. In the
circumstances a claim under the DIY Builders Scheme could not be made.
82.
Mr Rayner submitted that Mr Safdar and the appellants ought to have
received better advice from HMRC as to how they might fully recover input tax
on construction costs. In particular he submitted that there had been
conflicting advice from HMRC in the light of which it was not appropriate to
impose a penalty.
83.
In considering the penalty we are concerned in particular with the
position from May 2008 to May 2010 when the 04/10 Return was submitted. We do
not accept that the advice from Mr Sanders during this period was in any sense
conflicting. He was seeking to alert the appellant and Mr Safdar to the two
different methods by which the appellant could obtain a repayment of input tax
incurred. We acknowledge that this is not a straightforward area of law.
However we consider Mr Sanders outlined the options available to the appellant
in a reasonably straightforward way. He also identified the conditions
attaching to each route. Matters were fairly left in the hands of Mr Safdar. It
has not been suggested by Mr Rayner that there was any other route by which the
mosque could recover the input tax incurred.
84.
It is not disputed that the 04/10 Return contained an inaccurate claim.
In the light of our findings of fact based on Mr Ahmad’s evidence we consider that
the inaccuracy should be viewed as comprising two elements. Firstly the claim
to 35% of the input tax incurred, and secondly the claim for 65%. We consider
that each of these elements amounts to a separate inaccuracy for the purposes
of Schedule 24. We shall refer to these inaccuracies as “the 35% Claim” and
“the 65% Claim” respectively.
85.
When Mr Safdar prepared the 04/10 Return he fully expected a visit and
hoped, in some way, to convince HMRC to increase the amount of input tax credit
from the 65% which had previously been offered. However when he advised Mr Khan
to sign the return he was aware that the mosque was not entitled to recover any
input tax at all at that stage. Nothing had changed from his discussions in
2008 and 2009. Mr Safdar knew that nothing had changed. His decision to advise
the appellant to make a claim to which it was not entitled amounted to advice
to submit an inaccurate return. In doing so we consider that Mr Safdar was highly
naïve rather than dishonest. Subjectively he did not consider what he was doing
to be dishonest because he fully expected a visit from HMRC at which the claim
would be discussed and negotiated.
86.
Notwithstanding the position of Mr Safdar, Schedule 24 requires the
inaccuracy to be deliberate or careless on the part of the appellant rather
than its adviser. It is the actions and state of mind of the appellant on which
we must focus.
87.
The management committee was well aware that the 04/08 claim had been
refused and on any view Mr Khan was aware that they were not entitled to claim
100% of the input tax incurred. Mr Safdar’s advice was to the effect that the
appellant could properly submit an inaccurate return. Any reasonably
conscientious taxpayer ought to have realised that a claim to repayment should not
be made unless there is reason to justify the claim. The management committee had
no reason to consider that the 35% Claim could be justified. We acknowledge
that Mr Safdar prepared the return for signature by Mr Khan. However the
management committee, in particular Mr Khan who had all the correspondence from
2008 and 2009, must have known that the appellant was not entitled to the 35% Claim.
88.
We find therefore that there was a deliberate inaccuracy in relation to
the 35% Claim. We stress however that this should not be taken to imply any
finding of dishonesty. The circumstances in which the 35% Claim came to be made
are highly unusual. In most cases where an individual signs a return knowing it
to be inaccurate that individual will be acting dishonestly. However in the
present case we accept that Mr Khan and the management committee genuinely
believed that it was appropriate to reclaim 100% of the input tax incurred as
some sort of negotiating position. That was the advice they had been given by
Mr Safdar and they accepted it in good faith.
89.
We now consider whether the 65% Claim amounted to a deliberate
inaccuracy, a careless inaccuracy or neither. In our view carelessness can be
equated with “negligent conduct” in the context of discovery assessments under section
29 Taxes Management Act 1970. Negligent conduct is to be judged by reference to
the reasonable taxpayer. The test was described by Judge Berner in Anderson (deceased) v Revenue and Customs Commissioners [2009] UKFTT 206 at [22], cited with approval by the Upper Tribunal in Colin
Moore v Revenue and Customs Commissioners [2011] UKUT 239 (TCC):
“The
test to be applied, in my view, is to consider what a reasonable taxpayer,
exercising reasonable diligence in the completion and submission of the return,
would have done.”
90.
The appellant’s case, through Mr Ahmad’s evidence, is that the committee
was unaware anything else needed to be done to. We have accepted that Mr Ahmad
was unaware that anything else was required before the claim could be made. In
the light of Mr Safdar’s evidence we have found that Mr Khan ought to have been
aware that HMRC required further information before any repayment return could
be paid however we are unable to say that he was aware in May 2010 that further
information was required. In the light of that finding we are not satisfied that
Mr Khan deliberately made the inaccurate 65% Claim. We accept that he genuinely
believed, on Mr Safdar’s advice, that the 65% Claim could be made in the 04/10
Return. In our view making the 65% Claim in those circumstances was clearly
careless.
91.
When the case was opened before us, we raised the possibility that the
appellant might wish to rely on paragraph 18 Schedule 24. Mr Rayner did
rely on that paragraph during his closing submissions although he did not
expand on the basis of his reliance.
92.
The next issue which we must address is whether and if so to what extent
it is relevant that Mr Khan, when he signed the 04/10 Return, did so on the
advice of Mr Safdar. We have not heard any evidence from Mr Khan, which as we
have said is unfortunate given that he was the treasurer and had responsibility
for VAT matters.
93.
It seems to us that liability for a penalty for careless action requires
a failure by the taxpayer to take reasonable care. Paragraph 18 reflects the
fact that taxpayers will often use agents in the course of their dealings with
HMRC. The effect of paragraph 18 is to ensure that even in cases where agents
are used the liability of a taxpayer depends on whether the taxpayer took
reasonable care
94.
We repeat what Judge Cannan has previously said in Hanson v HMRC
[2012] UKFTT 314 (TC) in the First-tier Tribunal in the context of
paragraph 18:
“ 21.
What is reasonable care in any particular case will depend on all the
circumstances. In my view this will include the nature of the matters being
dealt with in the return, the identity and experience of the agent, the
experience of the taxpayer and the nature of the professional relationship
between the taxpayer and the agent. In my view, if a taxpayer reasonably
relies on a reputable accountant for advice in relation to the content of his
tax return then he will not be liable to a penalty under Schedule 24.”
95.
The appellant had available to it, or ought to have had available to it,
the correspondence with HMRC in 2008 and 2009. We have founds as a fact that
this correspondence made clear that repayment through a VAT return would require
an option to tax to be accepted by HMRC. The appellant had failed to respond to
the letter dated 27 November 2008 to give the confirmations required by that
letter. It failed to respond to subsequent correspondence. In those
circumstances there was no certainty that the option to tax would be accepted,
and if it was accepted from what date it would be effective. In the light of
this correspondence and taking into account all the circumstances we do not
consider that the appellant was entitled to accept Mr Safdar’s advice at face
value.
96.
Mr Safdar’s evidence was that the committee was aware that further
information and instructions were required before the claim could be justified.
In the absence of any evidence from Mr Khan, who had primary responsibility for
VAT matters, we have found that he ought to have been aware that further
information was required by HMRC to justify the 65% Claim.
97.
Based on the evidence we have heard we accept that Mr Khan did not
deliberately include the inaccurate 65% Claim in the 04/10 Return. He relied on
the advice of Mr Safdar. However we do not accept that the management
committee, acting through Mr Khan, took reasonable care to ensure that the
04/10 Return was accurate. The management committee and Mr Khan in particular knew
that the previous claim had been refused and they failed to satisfy themselves as
to the basis on which the 65% Claim could be made in 2010.
98.
Mr Rayner’s overarching submission was essentially that the entitlement
to repayment was a complicated area as to which the appellant was justifiably confused.
The inaccuracy could not be described as either deliberate or careless. Even if
it was careless the appellant could rely on paragraph 18(3). For the reasons
given above we do not accept those submissions. We consider that the 35% Claim
was a deliberate inaccuracy and the 65% Claim was a careless inaccuracy.
99.
During the course of his submissions Mr Rayner also pointed to a number
of confusing passages in the respondents’ statement of case for this appeal. We
accept that in some respects the statement of case is confusing but we do not
accept that this has affected the ability of the appellant to fully present its
case on this appeal.
100. Mr Rayner did
not suggest that the HMRC guidance as to what reductions to make by reference
to the quality of disclosure was unreasonable. He did in effect challenge the
decision of Ms Lyddon in applying that guidance. We agree that the reductions
applied to the penalty do not reflect the quality of disclosure given by the
appellant. In particular we have not found that the management committee sought
to mislead Ms Lyddon during her visit. Nor do we consider that the management
committee could have been more helpful in quantifying the inaccuracy given
their confusion over the basis of the claim. In those circumstances we see no
reason not to give the full reduction of 30% for “telling” and 40% for
“helping” in addition to the 30% reduction given by Ms Lyddon for giving access
to records.
Generally
101. In the
circumstances we allow the appeal in part. We can summarise the effect of our
decision as follows:
(1)
We affirm that a penalty is payable by the appellant.
(2)
We substitute our decision that the 35% Claim was a deliberate
inaccuracy and the 65% Claim was a careless inaccuracy. In each case the
penalty imposed should be reduced to the minimum percentage so as to reflect
the quality of the appellant’s disclosure.
(3)
In the case of the 35% Claim the minimum penalty for a prompted
disclosure is 35% of the PLR which amounts to £5,171.21
(4)
In the case of the 65% Claim the minimum penalty for a prompted
disclosure is 15% of the PLR which amounts to £4,115.86.
102. HMRC have not
considered whether to suspend any part of the penalty. If it had been wholly
deliberate they would have had no power to do so. In the light of our findings
it will be necessary for HMRC to consider whether or not to suspend the penalty
in relation to the 65% Claim. If the parties are unable to agree whether that
penalty should be suspended or the conditions on which it should be suspended
then we give permission to either party to apply to restore the appeal for
consideration of that matter. Any such application should be made within 90
days from the date on which this decision is released.
103. This document
contains full findings of fact and reasons for the decision. Any party
dissatisfied with this decision has a right to apply for permission to appeal
against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal)
(Tax Chamber) Rules 2009. The application must be received by this Tribunal
not later than 56 days after this decision is sent to that party. The parties
are referred to “Guidance to accompany a Decision from the First-tier Tribunal
(Tax Chamber)” which accompanies and forms part of this decision notice.
JONATHAN
CANNAN
TRIBUNAL JUDGE
RELEASE DATE: 30 May 2013
