20865
VALUE ADDED TAX ... misdeclaration penalty — full explanation of inaccuracy of return provided with return — no penalty due — VATA 1994, s 63(10)(b) — appeal allowed
MANCHESTER TRIBUNAL CENTRE
ALAN BOFFEY Appellant
- and -
THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS Respondents
Tribunal: Colin Bishopp (Chairman)
Sitting in public in Birmingham on 25 July 2008
The Appellant in person
Kim Tilling, of their solicitor's office, for the Respondents
© CROWN COPYRIGHT 2008
DECISION
- The supply which gives rise to this appeal was made to the Appellant, Alan Boffey. It consisted of work carried out for Mr Boffey at his home. It is a Grade II listed building, which was converted to a single dwelling. It is now common ground that the builder's charges for the conversion, or most of them, attracted VAT at the reduced rate of 5 per cent. However, HMRC were not always convinced that that was the case, and it may be that some incorrect, or ambiguous, advice was given by HMRC to the builder, a Mr Harris.
- Whether or not by reason of that advice, Mr Harris added VAT at 17.5% to his charges which, despite his belief that the charge was incorrect, Mr Boffey paid. There then followed a prolonged dispute between Mr Boffey and Mr Harris on one side and HMRC on the other about the correct VAT charge. The dispute led to an appeal to this tribunal, which was withdrawn when HMRC conceded that the reduced rate was due on much of the work. HMRC issued a clear ruling to Mr Harris that the reduced rate was appropriate, and authorised him to issue a credit note and make a refund to Mr Boffey, and to make a corresponding adjustment in his VAT account. For reasons which I did not learn—Mr Harris did not attend the hearing before me, and Mr Boffey did not know them—Mr Harris did not make a refund to Mr Boffey, despite the latter's efforts to persuade him to do as HMRC had directed, nor did he adjust his VAT account. Mr Boffey, finding himself unable to secure a refund from Mr Harris and unable to persuade HMRC to make a payment to him of the overpaid VAT without the involvement of Mr Harris, resorted to self-help.
- Mr Boffey is VAT-registered, though he accepts that, whatever the correct rate of tax may be, he cannot recover the VAT he has paid as input tax since the supply was not made to him in his capacity of VAT-registered trader. However, when he completed his VAT return for period 04/07 he added to the claim for input tax credit the sum he had overpaid to Mr Harris. It was not entirely clear, at the hearing, how he had done so as a copy of the return was not available, but one was provided to me later and it was apparent that the input tax for which credit was claimed, on the face of the return, was the aggregate of the true figure and the sum overpaid to Mr Harris. When HMRC realised what he had done, they imposed on Mr Boffey a penalty for misdeclaration, in accordance (or purported accordance) with section 63 of the Value Added Tax Act 1994. The maximum possible penalty was £999, but mitigation of 20 per cent was allowed, reducing it to £799. By the time Mr Boffey's appeal against the penalty came before me, the mitigation had been increased to 65 per cent and the penalty had correspondingly been further reduced to £649.35.
- The relevant parts of section 63 (as it was in force at the time—it has since been repealed and replaced) were in these terms:
"(1) In any case where, for a prescribed accounting period—
(a) a return is made which understates a person's liability to VAT or overstates his entitlement to a VAT credit …
and the circumstances are as set out in subsection (2) below, the person concerned shall be liable, subject to subsections (10) and (11) below, to a penalty equal to 15 per cent of the VAT which would have been lost if the inaccuracy had not been discovered.
(2) The circumstances referred to in subsection (1) above are that the VAT for the period concerned which would have been lost if the inaccuracy had not been discovered equals or exceeds whichever is the lesser of £1,000,000 and 30 per cent of the relevant amount for that period.
(3) Any reference in this section to the VAT for a prescribed accounting period which would have been lost if an inaccuracy had not been discovered is a reference to the amount of the understatement of liability or, as the case may be, overstatement of entitlement referred to, in relation to that period, in subsection (1) above …
(10) Conduct falling within subsection (1) above shall not give rise to liability to a penalty under this section if—
(a) the person concerned satisfies the Commissioners or, on appeal, a tribunal that there is a reasonable excuse for the conduct, or
(b) at a time when he had no reason to believe that enquiries were being made by the Commissioners into his affairs, so far as they relate to VAT, the person concerned furnished to the Commissioners full information with respect to the inaccuracy concerned."
- Taking the return alone, subsection (2) was satisfied because the amount by which Mr Boffey overstated the allowable input tax exceeded 30 per cent of the "relevant amount" (defined by subsection (4) as the gross amount of VAT for the period) and the excess VAT he had paid to Mr Harris, even if it had been a sum due to him from the Commissioners, was not "VAT for the period concerned" since it related to a supply made some time before.
- Understandable though Mr Boffey's frustration was, the course of conduct he adopted is clearly incorrect. Had the matter rested with an inaccurate return, I would have had little hesitation in upholding the penalty, though I would have considered carefully the mitigation which HMRC had allowed. However, Mr Boffey sent with his return a clear account of the output tax for which he was liable and of the input tax for which he was claiming credit (and the Commissioners take no issue with the details he provided), and he made it clear in that account and in a covering letter that he was adding to the claim for credit the amount of tax owed to him by Mr Harris, which he had been unable to recover by any other means. Happily for Mr Boffey, he has now recovered the tax, and the only question before me in this appeal is whether the penalty should be upheld and, if so, the extent of the mitigation.
- In my judgment the fact that Mr Boffey adopted a course which, as he conceded to me, he knew was incorrect makes it impossible to conclude that he has a reasonable excuse within the meaning of subsection 10(a). But, although I doubt whether it was what the draftsman had in contemplation, subsection 10(b) seems to me to be directly in point: Mr Boffey's affairs were not under investigation, and he provided a full explanation of the inaccuracy at the same time as he furnished the return in which it appeared. In my view it follows that no penalty was due under section 63, and that the appeal must be allowed. Moreover, although the return itself was inaccurate, the documents Mr Boffey provided, taken together, contained no inaccuracy at all.
- Even if I am wrong in that conclusion, it seems to me that this is one of those (relatively rare) cases in which the power to mitigate the penalty, granted by section 70 of the 1994 Act, should be exercised to its full extent. Though Mr Boffey acted incorrectly, he was open about what he was doing. He was recovering, albeit in an incorrect manner, money which the Commissioners themselves agreed was owed to him, money which he had paid and which the Commissioners had received yet which was not due to them. Though self-help of the kind in which Mr Boffey indulged is not to be encouraged, it seems to me, in the particular circumstances of this case, that any penalty which might, strictly, be due should be reduced to nil. I would alternatively allow the appeal on that ground.
COLIN BISHOPP
CHAIRMAN
Release Date: 7 November 2008
MAN/08/0536
