A recent VAT case heard by the First-Tier Tribunal (Gekko & Company Ltd v HMRC (TC06029)) highlighted worrying aspects of HMRC’s handling of the case and even awarded costs against HMRC. The Tribunal clearly felt strongly about the case, with the decision stretching over 29 pages for a case involving an assessment to VAT of £69 and three assessments of penalties of £780, £8.85 and £10.35 respectively.
The decision begins by stating that it , “is a great deal longer than we would ordinarily write in a case involving such small amounts: this is because there are a number of disturbing features about the way the case has been conducted by the respondents (HMRC).”
The case involved a property developer company who HMRC claimed had made errors on their VAT returns, with the biggest one being an omission of £5,200 of output tax (which the Tribunal later found to actually be £4,880).
The penalty notices were found to be invalid because the original assessments had been withdrawn and new ones had not in fact been issued. The tribunal found that, even if they had been valid, the penalty of £780 should have been reduced to nil as the behaviour was careless but the disclosure was unprompted and that the other two penalties should be cancelled as there was no inaccuracy.
In deciding to award costs to the taxpayers, the Tribunal were particularly critical of HMRC. We enclose a passage from this below regarding HMRC’s change of opinion from an unprompted to prompted disclosure:
“We consider, having thought about this long and hard, that there are two possible explanations for this volte face. One is that there was incompetence on a grand scale. The other is that there was a deliberate decision to keep the dispute alive, when on the basis of the reviewing officer’s remarks it would have been discontinued, by seeking to revisit the “prompted” issue. The facts that have caused us not to dismiss this possibility include the minimal information about the change with no explanation and the hopelessly muddled response with its spurious justification that Miss Pearce sent when the appellant spotted the change. Of course we have had no evidence from those involved and do not intend in this decision to make any findings about the matter. But it is something we have to take into account in deciding whether HMRC’s conduct in this case was unreasonable.”
The Tribunal cancelled the VAT and penalties and awarded costs to the taxpayer.
Overall, this case seems to echo our recent experiences with HMRC and shows a worrying trend in decreasing quality of HMRC case handling and emphasis on winning at all costs, regardless of the merits of individual cases.
County cricket clubs were first to be targeted by HMRC enquiry. They have broadly been given a clean bill of health, although questions are still being asked about tax associated with image rights for Test players and there have been problems with the tax position of players’ agents.
HMRC though have denied it is targeting local sports clubs after a Hertfordshire cricket club was sent a tax bill of over £14,000.
Sawbridgeworth Cricket Club, a 151-year-old amateur team with an annual income of around £21,000, received the bill after the Revenue carried out an assessment in 2012.
However, after HMRC agreed a schedule of staged payments and waived penalties, the club was able to settle the bill with money raised from fund-raising events and an interest-free loan.
Community amateur sports clubs are exempt from corporation tax on profits of less than £30,00 a year, but employees such as bar staff are subject to PAYE.
An HMRC spokesperson said the department wasn’t targeting amateur clubs, but non-compliance with the PAYE regime.
“This kind of work is normal. HMRC works to ensure employers are correctly operating the payroll system, so that everyone pays the right amount of tax. We have worked with sports clubs to put things right if necessary,” the spokesman said.
The England & Wales Cricket Board (ECB) has issued guidance notes to clubs, outlining what HMRC wants, urging them to seek advice and warning they could face penalties for failing to meet PAYE and NIC payroll deductions. “Do not accept any HMRC calculations without challenge, but use the results of your review to negotiate with HMRC,” says the ECB.
HMRC’s crackdown on tax evaders continues. A recent case saw a London barrister being convicted of tax fraud and sentenced to 3 and a half years in prison. HMRC investigators found he had failed to declare or pay over £600,000 of VAT over 12 years.
Mr Pershad’s VAT registration was cancelled by HMRC in 2003 with effect from 1999, after a history of failure to submit tax returns and also not telling HMRC about a change of address. This resulted in him being unable to legally trade above the VAT threshold, which was between £54,000 in 2001 and £67,000 in 2008.
On completion and submission of his self-assessment tax returns, they showed his income had increased from £85,000 in 2001 to £346,000 in 2008, hence breaching the VAT registration limit.
During this time he continued to use his invalid VAT number on invoices, hence collecting the VAT on the fees he charged his clients but keeping the money for himself.
In another case, two businessmen have been jailed for fraud and tax evasion after hiding £500,000 in offshore bank accounts over a 6 year period.
The business men were given the opportunity to disclose their offshore accounts through HM Revenue & Customs’ Offshore Disclosure Facility (ODF). One of the two men did not register for the facility whilst the other only disclosed one of the 12 accounts he controlled.
The men ran a company offering computer technology to the automotive industry, with many of their clients based in Germany. After close inspection, sales in Germany were in the region of £1.26m, while only £49,650 of this money in sales for the same period was declared to HM Revenue & Customs. The balance was divided into offshore accounts of five shell companies registered in Mauritius and the Isle of Man, created solely for the purpose of tax fraud.
The men were jailed for 15 months and 12 months respectively. Confiscation orders were issued under Proceeds of Crime legislation in respect of amounts totaling £500,000 which must be paid within 24 months or the men will be jailed for a further 15 and 12 months respectively.
Penalties for deceased persons have been an area of contention recently. For those individuals who die not having their tax affairs in order, HM Revenue & Customs are able to go back and enquire into an individual’s tax affairs for the 6 tax years prior to the date of the deceased’s death, in the case of careless or deliberate understatement of tax.
However, HM Revenue & Customs are no longer allowed to apply penalties for deceased persons in relation to the tax affairs of the 6 tax years preceding the individual’s death as it is deemed to be a contravention of an individual’s human rights.
Eaves and Co have been able to apply this to a recent client situation where an individual had died not disclosing trading income to HM Revenue & Customs. This had led to undisclosed profits resulting in unpaid tax for the 6 years prior to their death. This would have incurred significant penalties for non-disclosure without the case law findings against the application of penalties.
The recent tribunal case of Seacourt Developments Limited v HMRC involved appeals against a number of determinations by HMRC in respect of PAYE, national insurance contributions (NICs) and Construction Industry Scheme (CIS) deductions.
Seacourt had previously stated that it only had seven employees via its P35 and no subcontractors were detailed in its CIS returns for 2005/06. In August 2008 the company’s new auditors submitted a revised schedule showing “workers” for 2005/06 as being 176, however no additional detail could be provided on their status as Seacourt did not provide it.
HMRC subsequently issued determinations for the 169 additional “workers” from 2005/06 -2007/08 on the advice of the company’s accountants (Seacourt failed to arrange a meeting with their accountants to discuss the issues). HMRC made an estimate as to which “workers” should have been dealt with under PAYE and CIS, with the total amount of PAYE and NIC due being £758,124.
In addition to the tax due HMRC also issued penalty notices. The maximum amount that could be charged was 100% of the tax due; however HMRC mitigated the penalty by reducing it by 10% for disclosure (max 20%), 20% for co-operation (max 40%) and 20% for seriousness (max 40%). The result being that the penalty was reduced to 50% of the tax due.
Seacourt appealed against the penalty but the judge ruled in HMRC’s favour. However, perhaps most surprisingly the tribunal ordered that the penalty be increased to 95% of the tax found to be due, bringing the total penalty to £720,217.80 (previously £379,060).
The penalty was increased on the basis that Seacourt had failed to co-operate and the offence was serious in nature, and therefore the discounts previously afforded by HMRC were removed. The tribunal also felt the disclosure was not of sufficient quality to warrant a 10% reduction and reduced it to 5%. As a result the maximum penalty was only reduced by 5%.
The overall outcome of the case is not surprising given the facts, however the fact that the tribunal ordered the penalty to be increased is. This could have an impact on HMRC’s penalty mitigation criteria in the future and also make taxpayers think twice before appealing an already reduced penalty.
The Contractual Disclosure Facility or CDF is the new way in which HMRC tackle suspected tax fraud.
The CDF facility provides an option for the taxpayer to declare all their tax irregularities and settle them along with interest and penalties. In return HMRC will not bring criminal charges, provided the declarations under the CDF are complete and accurate.
We have seen a number of examples of HMRC applying the new CDF process recently. It is important to note if the taxpayer does decide to make a detailed declaration that good consideration should be given the content of the “Outline Disclosure” that HMRC request within 60 days of their initial letter. HMRC do put a lot of emphasis on what was said in the Online Disclosure during the rest of their investigation, in terms of penalties and threatening to bring criminal charges.
Following HM Revenue & Customs crack down on tax avoidance, taskforces introduced in May 2011 are now focusing on the activities of various London barristers and other legal professionals who they feel may have unpaid taxes.
HMRC believe that these investigations along with other groups such as hairdressers, tattooists and restaurants in various locations around the country will bring in approximately £19.5m.
This will help them to meet their target of £50m being recovered by the 30 taskforces launched last year.
With the aggressive tactics, it is probable that investigations and enquiries will be on the increase, with HM Revenue & Customs warning that they are “coming after you”.
In the recent case of Mr Shakoor v HMRC, the appellant had failed to disclose the sale of two flats in July 2003 which resulted in significant capital gains. HMRC subsequently raised a discovery assessment for CGT of £49,014 plus a penalty of 70%.
The appellant contended the penalty on the basis that he had taken reasonable care by seeking advice from his accountant. He said the failure to disclose the gain was as a result of negligent advice from his accountant.
The accountant did advise that there was no CGT to pay, and that the disposal of the properties was not reportable on the tax return. However the accountant kept no notes of his advice but said he had relied upon two extra-statutory concessions relating to private residence relief. These clearly did not apply as the appellant had never resided in either property but the taxpayer asked for no explanation of this advice.
The Tribunal found that the taxpayer must have been aware that CGT was due on the properties, and it appeared to be “a case of shutting one’s eyes to what either was or ought reasonably have been seen as incorrect advice”.
The Tribunal did in fact cut the penalty to 30% giving the appellant the “benefit of the doubt” as a result of the poor advice given by his adviser. It observed that the appellant was content to “take a chance on the basis that his accountant had given him comfort, albeit in the rather dubious circumstances”