In M Hodges v HMRC [2015] a taxpayer successfully reduced VAT penalties of £394,694 to £7,807. He was found guilty of dishonesty however HMRC had failed to exercise “best judgement” in assessing the VAT penalties as required by the law.
Mr Hodges ran a scafolding company, Aqua Scaffolding Limited "Aqua" in South East London between 2006 and 2011.
One of HMRC's south London tax offices ran a series of “street sweeps” under which an employee of HMRC would travel down a residential street noting down the phone numbers and vehicle details of builders, scaffolders, skip companies and associated traders working on different houses. HMRC would then visit the traders and inspect their books to see whether there were invoiced sales for the addresses sighted.
Over the course of 2008 to 2010 HMRC made some ten sitings of Acqua's scaffolding, and of these found only one invoice for a sighting in its records. In the company's receipts HMRC found that Acqua had made one purchase of disposable gloves in one large pack, and had also puchased one large pack of embroidered T-shirts. It appeared from a couple of petrol receipts that the company had filled two vehicles with fuel on one receipt.
The one man company had a declared turnover of £401,915 for the four and half year period of VAT quarters from 12/06 to 03/11. On the basis that the company had failed to return nine out of ten of the street sweep sightings HMRC multiplied turnover by 10 and assessed the company for the VAT due on a now revised turnover of £4,019,150 less the £401,915 of sales already declared, it arrived at £529,536 of VAT penalties.
HMRC assessed the director for penalties on the basis of dishonest conduct.
It allowed a late penalty appeal and representations were made to it on the basis that its officer had not shown best judgement in making such huge assessments, as it is required to do so by section 73 VATA 1984. It was pointed out that it was physically impossible for one man to errect £4 million of scaffold, and there was no evidence of a ghost workforce, a secret fleet of vehicles or any evidence of the supressed expenditure that would be needed to support such a large operation. The director was living in a one bed flat.
A review by HMRC and subsequent mediation proved fruitless. HMRC refused to give any ground. HMRC put the company in liquidation. The original appeal was struck out but then reinstated and heard by the First Tier Tax Tribunal (FTT) in 2015.
In evidence, the director provided an explanation for the lack of invoicing for two more of the street sweep sightings, he was unable to remember the others. An invoice was also located for an address which had been sweeped but that scaffold had not been noted in the sighting.
HMRC's officer gave evidence and there was written evidence in the form of extracts of note pads, it was not possible to tell how many other scaffoldings HMRC had noted but not recorded, nor how often HMRC made the "sweeps". over what area and by how many staff. HMRC's sample appeared small and it was pointed out that the writing on the note pads did not seem to be the hand of many officers but that of a single hand.
HMRC itself admitted in its statement of case that its assessment was "unrefined".
FTT found that the director was guilty of dishonest conduct, he had concealed taxable takings. However it found that HMRC's assessment was not made according to best judgement, the street sweep sample was too too small to be used to extrapolate sales and HMRC's assessment was unrefined. It requested the parties to submit revised assessment and penalty calculations and it favoured those of the taxpayer which considered how many man hours were available in each year, and how much scaffold that it would have been physically possible for one man to lift.
Comment
Whilst appreciating that HMRC want to discourage dishonesty in any shape and form, it is disappointing that this case managed to go through a review and mediation without any attempt by HMRC to revise its calculations. HMRC's assessments were extraordinary and there was no attempt at any form of business economics to back up the assessments. The sampling techniques were shown to be unreliable.
It has come to light, since the decision was published that the officer who raised the assessments in this case has some form when it comes to excessive VAT assessments and one of the other officers in this case was noted in a case last year where there were some equal asssessment absurdities.
Links: M Hodges v HMRC [2015] TC04419
Back to: Nichola's SME Tax Update 17 June 2015
