In M J Hickey Plant Hire And Contracts Ltd v HMRC [2017] UKUT 0308, the Upper Tribunal (UT) concluded that a consistent VAT error, where the last day of the quarter was always included in the next VAT return suffered the lower delayed tax penalties, not those calculated under normal rules.
Penalties for inaccurate VAT returns are calculated based on the ‘potential lost revenue’ (PLR). The way in which the PLR is calculated depends on the type of error.
In this case HMRC argued that the normal rules apply and all errors should be added together: in contrast the taxpayer argued that the ‘delayed tax’ rules apply, which would result in a significantly lower PLR.
- The client used computer software to complete VAT returns and claimed that the default setting was to stop the quarter one day before the quarter end date and include the last day in the following quarter.
- It was ultimately found that the main reason for this approach was to improve cash flow as the output tax generally exceeded the input tax on the last day of the quarter.
- HMRC carried out a review of 15 returns and found that 9 included under-declarations and 6 had over-declarations.
- In all cases, the last day of the quarter was included in the following quarter, meaning the error was always corrected on the following VAT return.
- HMRC assessed the taxpayer for penalties, adding up all of the under-declarations, ignoring the adjustments in the subsequent period. This was the PLR they used in establishing penalties of £149,186.
- The taxpayer appealed and disputed that the penalties should be based on the delayed payment rules, giving a lower PLR and penalties of £1,865.
The First-Tier Tribunal (FTT) agreed with HMRC that PLR should be based on the aggregate errors. The FTT reasoned that this was because the errors were deliberate, so the taxpayer could not use the delayed payment rules. The taxpayer appealed to the UT.
HMRC did not support the reasoning of the FTT in reaching their verdict. The UT considered that HMRC were right to dismiss this approach:
- HMRC took the view that each return contained an inaccuracy and they should be looked at independently.
- If two returns were taken together, such that the errors effectively netted off, this would take account of the intention of the taxpayer which is not within the provisions of the law.
The UT disagreed with HMRC and agreed with the taxpayer:
- It is clear that the delayed tax rules apply.
- If you were not allowed to take two returns together when establishing errors, there would be no need to have the special delayed tax rules.
- The delayed tax rules can only apply when tax was put on a later return, therefore, it is must envisage that an error encompassing two returns would be combined and not treated separately.
In this case, the UT concluded that the delayed tax rules applied for calculating PLR. The PLR was 5% of the delayed tax for each year of the delay and not the aggregate of the under-declarations.
Links
Penalties: Errors in Returns and Documents (subscriber version)
External link
M J Hickey Plant Hire And Contracts Ltd v HMRC [2017] UKUT 0308
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