Weekly VAT Update – 8 August 2017
HMRC pursues £69 as well as three penalties
We only cover penalty cases if there are special or unusual points and this is one such case. It involved appeals against an assessment for VAT of £69, and against three assessments of a penalty for £780, £8.85 and £10.35. The Judge stated at the beginning of the judgement: “We have put the amounts in words in the last paragraph to make it clear that there is no typographical error in setting out the amounts in dispute. This decision 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”). We except Miss Hickey, the presenting officer, from any strictures on this score”.
The situation arose because HMRC arranged a VAT inspection visit to the trader, Gekko and Company Limited. Ultimately, there were three issues: the sale of land for £26,000 in June 2011 which had not been reported until the June 2014 return, input tax on motoring expenses and some input tax on purchases relating to a particular property.
With regard to the first issue, the officer’s notes indicated that the rectification of the error should be regarded as unprompted because it was disclosed in June 2014, when the company did not know that an inspection would take place in February 2015. An independent review was carried out by HMRC, the result of which was that the sale of land issue would no longer be considered careless but deliberate. There follows much discussion concerning the facts and actions by HMRC in changing its mind, of which the judge said there were two possibilities – incompetence on a grand scale, or a deliberate decision to keep the dispute alive when it would have been discontinued. The Judge continued by stating that Miss Pearce (the inspecting officer) or those superior to her, knowing that the disclosure of the land sale had been properly classified by her Pearce as unprompted, should have asked themselves whether it was proper for a department that prides itself on its dispute governance procedures to continue to defend these proceedings and should have come to the view that it shouldn’t.
For various reasons, the Appellant won on each of the four assessments which the Tribunal dismissed.
As a standard case, the Tribunal can only make an order for costs if it considers that a party or their representative has acted unreasonably in bringing, defending or conducting the proceedings. The Judge dealt with this by saying that there is one event in the case which is very disturbing – the instruction from the reviewing officer to the inspecting officer, and the particularly disturbing aspect is that the change to prompted was never explained to the Appellant. Worse, when the Appellant spotted the change, the Judge said it was given an explanation which simply beggars belief as an appropriate response; it involves a flagrant misreading of a passage from a VAT Notice and a complete ignoring of an admission Miss Pearce had made in the previous line. Accordingly, the Appellant was awarded costs.
A charity case on apportionment
This case concerned two estates of a charity called Will Woodlands. On North Barn estate, 50% was planned as woodlands and almost all the rest was farmed in hand, and so generated taxable supplies. There was also a residential property under rent. On Hazel Manor, the long-term activities were to be woodland, letting of residential properties and free of charge use of part of the estate for grazing sheep, and there would also be short-term grazing rights let for a fee. Since 2000/2001, the charity reached agreement with HMRC that business/non-business (93.59% recovery) and partial exemption (99.02% recovery) would be based on areas under use because income did not give a fair result as the woodlands would not generate income for many years.
In 2013 HMRC carried out an assurance visit. The percentages had reduced since the original agreement due to the purchase of two more estates. Following the visit, HMRC wrote to the charity stating that it no longer considered the agreement gave a fair and reasonable result, not least because it did not consider that the sale of timber was the primary objective of the charity. The accountants to the charity responded by saying that it was irrelevant what the primary objective was, and HMRC gave notice that the agreement is terminated from 1 October 2014, and subsequently made assessments from 10/14 to 3/15 for £36,866, and later for 4/15 and 3/16 for £36,8147. The officer of HMRC, when asked by the Tribunal why he thought the apportionment used by the Appellant did not give a fair result, he said it was because it allowed them too much input tax credit.
It was accepted that, if there is duality of purpose, an apportionment is required. However, the Appellant says that it is wrong to treat the operation and management of the woodland as partly for a non-business activity, just because there are non-economic aspects to the activity; the nature of the activities must be objectively determined and charitable aims or non-profit making status are irrelevant. The woodland operation and maintenance activities are clearly business activities, whether or not the maintenance supports a conservation aim. It also said that HMRC has asked itself the wrong question. The issue is not a ranking of the Appellant’s purposes but an objective analysis of the activity. If that analysis shows a business activity then the fact that it is undertaken for one or more reasons is beside the point. The phrase to determine recoverability of input tax is “direct and immediate link”. In this case, the trees will not be felled for many years – between 20 and 150 was mentioned at the hearing. However, the Tribunal said: “It seems to us that “immediate” cannot mean in the sense that there must be a short or very short time between the inputs and related outputs”. It then referred to a European case called Sveda, and went on to state: “We agree with the Appellant that the actual link in this case is closer in the sense that the costs and the sales are of the same goods, the trees. The trees whose cost is claimed as input tax are the very things that will give rise to output tax.”
HMRC’s proposed method was based on income in respect of which the Tribunal said that HMRC’s attempted ironing out of the obvious distortion is hopelessly flawed. It presupposes that it can be established exactly when sales of timber will arise and exactly how much they will raise. The evidence of Mr Tustin, a witness and forestry manager dealt a devastating blow to this idea. In this case HMRC also showed a lack of understanding of the business and taxation of woodlands, and the Tribunal found that the land area split was fair and reasonable. The appeal was therefore allowed and the assessments dismissed.