Revenue and Customs v Chamberlin

Ms Marie Chamberlin (“the Applicant”) was, at the material time, a solicitor practising in the field of asylum and immigration law. She was registered as a taxable person for VAT purposes. As required by the VAT Act 1994 and regulations made thereunder, the Applicant made returns from time to time disclosing substantial sums as due to HMRC in respect of VAT but failed to discharge them. On 22nd April 2005 she was served (by substituted service) with a statutory demand seeking payment of £28,559.79 in respect of VAT due, interest and penalties. No payment was made in respect thereof and on 23rd June 2005 the Applicant was personally served with a bankruptcy petition presented by HMRC on 26th May 2005 based on that debt and demand. The Applicant did not appear on the hearing of the petition and a bankruptcy order was made against her by Mr Registrar Rawson on 9th September 2005.

On 14th December 2005 the Applicant applied under s.282(1)(a) Insolvency Act 1986 for the annulment of the bankruptcy order on the ground that it ought not to have been made. That application was ultimately dismissed by Mr Registrar Nicholls on 7th December 2006. In the meantime the Applicant appealed to the VAT Tribunal but her appeal was rejected on technical grounds. On 4th July 2006 she applied to HMRC for the correction of errors in her returns pursuant to VAT Regulations 1995/2518 paragraph 35, conventionally called a voluntary disclosure. That application was rejected by HMRC on 2nd October 2006.

On 25th March 2009 the Applicant again applied under s.282(1)(a) for an order annulling the bankruptcy order made against her on 9th September 2005 on the ground that it should not have been made. Her application was supported by her witness statement made on 25th March 2009 contending that no VAT was due to HMRC. An officer of HMRC, Mr Thomas, made a witness statement on 13th May 2009 challenging the Applicant’s contentions to which the Applicant replied by means of a witness statement made shortly before the hearing of her application on 8th July 2009. The annulment application was rejected by Chief Registrar Baister. The Chief Registrar noted that the petition debt was based on the Applicant’s own returns. He described the proceedings, the Applicant’s appeal and voluntary disclosure and their rejection. He concluded in paragraph 8:

On 24th July 2009 the Applicant issued an appellant’s notice. On 20th August 2009 she made a further voluntary disclosure under regulation 35 seeking the amendment of those parts of her returns she contended were completed in error; but that application was rejected by HMRC on 14th September 2009 as being out of time. Permission to appeal was granted by Mr David Donaldson QC, sitting as a deputy judge of the Chancery Division. For the reasons given in his reserved judgment handed down on 8th July 2010 he allowed the Applicant’s appeal and annulled the bankruptcy order made against her on the ground that:

The question for our determination is whether on grounds existing at the time it was made, namely on 9th September 2005, the bankruptcy order ought not to have been made. I will consider that issue and the rival arguments presented to us in respect of it in due course. First it is necessary to refer to the structure and details of the VAT regime, to certain aspects of the Insolvency Act and the practice of the Bankruptcy Court and to the judgment of the deputy judge.

VAT Act 1994 s.1 provides for value added tax to be charged in accordance with the provisions of the Act on inter alia the supply of services in the United Kingdom. Subsection (2) stipulates that VAT on such a supply is a liability of the person making the supply and, subject to the provisions relating to accounting and payment, becomes due at the time of supply. S.3 requires the registration of taxable persons and s.4 stipulates that a supply to be taxable must be made in the course of a business carried on by the taxable person. Ss.5 and 6 deal with the concept of a supply and the time it is made. S.7 deals with the place of supply. At the time relevant to this appeal s.7(10) laid down the basic rule that the place of supply is determined by the place to which the supplier ‘belongs’. S.7(11) enables the Treasury to vary such a rule by order. That power had been exercised under the Act which preceded the VAT Act 1994 and has been continued under the present act so as to specify the place of supply in respect of lawyers’ advisory services as the country to which the recipient belongs if that country is not a Member State of the European Union, see VAT (Place of Supply of Services) Order 1992/3121.

S.24 defines the expressions “input tax” and “output tax”. Those expressions are then extensively used in s.25 and the regulations made thereunder in connection with the accounting and payment provisions. I should refer to subsections (1), (2) and (6). They provide:

S.73 provides a mechanism for assessment in cases where, inter alia, a person fails to make the returns required of him by the Act or makes incomplete or incorrect returns. In any such case HRMC may assess the amount of VAT due from that person. Subsection (9) provides that:

S.80 in the form relevant to this appeal provides for a person being given credit for or repayment of overstated or overpaid VAT but only on a claim being made for the purpose not more than four years after the relevant date as defined in subsection (4ZA). In the circumstances of this appeal the relevant date was the end of the accounting period in which the overstatement had been made. S.83 provides for appeals to the VAT Tribunal in a wide variety of matters. They include assessments under s.73 and a claim for a repayment or credit under s.80.

The relevant regulations are VAT Regulations 1995 SI 2518. Part V deals with accounting, payment and records. Regulation 25 requires every person registered for VAT periodically to make a return to the Controller in the prescribed form

Regulation 32 requires every taxable person to keep and maintain in accordance with that regulation an account to be known as the VAT Account. The Regulation sets out in some detail what the VAT Account should contain. The details include “the total of the output tax due from the taxable person for that [prescribed accounting] period”. Regulations 34 and 35 deal with the correction of errors in a return. Regulation 34 deals with errors to a value not exceeding £2,000. They may be corrected within 3 years since the end of the accounting period in which they occurred by means of a subsequent corrective return.

Regulation 35 deals with other errors. It provides:

Regulation 40 requires VAT to be accounted for in returns. Thus subparagraph (1) stipulates that any person making a return shall in respect of the period to which it relates account in that return for “all his output tax”. Sub-paragraph (2) provides that any person required to make a return shall pay “such amount of VAT as is payable by him in respect of the period to which the return relates...”.

A bankruptcy petition may be presented against an individual by a creditor to whom a sum certain in excess of the bankruptcy limit, currently £750, is owed which the debtor appears to be unable to pay, see ss.264-267 Insolvency Act 1986. S.268 provides that a debtor appears to be unable to pay a debt if, but only if, he has been served with a statutory demand requiring him to pay it and three weeks have elapsed since service of the demand. S.271(1) states that the court shall not make a bankruptcy order unless it is satisfied that the debt in respect of which the petition was presented has been neither paid nor secured or compounded for.

The statutory demand referred to in s.268 is prescribed by Insolvency Rule 6. Rule 6.4 provides a procedure enabling a debtor to apply to the court for an order setting aside a statutory demand served on him. The grounds on which the court may set a statutory demand aside are those set out in Rule 6.5(4). Those grounds include cases where “the debt is disputed on grounds which appear to the court to be substantial” or “the court is satisfied, on other grounds, that the demand ought to be set aside”. The Applicant did not apply to set aside the statutory demand served on her.

The interaction of the insolvency regime and the various tax regimes has led to a well established practice to the effect that the courts involved in the former leave the establishment of a liability to tax to the statutory procedures applicable by the latter. For instance the bankruptcy court does not usurp the jurisdiction of the VAT Tribunal by itself enquiring into matters within the statutory jurisdiction of the latter. This practice is well illustrated by Re Calvert [1899] 2 QB 145 and Lam v Inland Revenue [2005] BPIR 301.

In Re Calvert a debtor sought to expunge a proof for schedule D tax. This was rejected by Wright J. He said, at page 147:

In Lam v Inland Revenue the Revenue had served Lam with a statutory demand seeking payment of arrears of assessed tax and when Lam failed to comply presented a petition for his bankruptcy. Lam had throughout protested that the assessments were erroneous. He had appealed against some but not others. The Registrar made a bankruptcy order and Lam appealed. He continued to protest that he had not made the profits on which he had been assessed to tax. In his judgment Blackburne J said:

The same principle was expressed more broadly by Lord Nicholls of Birkenhead in Autologic Holdings plc v IRC [2006] 1 AC 118. That case did not concern bankruptcy proceedings but an attempt by the taxpayer to recover tax paid otherwise than by means of the statutory procedure. After referring to the statutory jurisdictions for which the Taxes Management Act and other statutes provided Lord Nicholls said:

In the case of judgment debts the bankruptcy court has been prepared to go behind the judgment to satisfy itself that the judgment was not collusive or otherwise for proper consideration, see for example Ex Parte Kibble (1875) 10 Ch App 373. In addition the general principle appears to have admitted of exceptions in the case of the late council tax, see for example London Borough of Lambeth v Simon [2007] BPIR 1629. Neither of those exceptions can avail the Applicant if, as I shall consider in due course, the statutory liability to VAT imposed by the VAT Act and subordinate legislation and the returns submitted by her in compliance with it created debts due by her to HMRC.

Finally in this section I should refer to s.282(1) Insolvency Act 1986. It provides that:

I have set out in paragraph 4 above the conclusion of the deputy judge on the basis of which he annulled the bankruptcy order. It is now necessary to consider the basis on which he reached that conclusion. Having set out the statutory framework of the VAT Act and regulations, the deputy judge commenced his discussion of the issue before him with the following statements in paragraph 10:

The deputy judge then considered whether a VAT return could give rise to a debt. He concluded that it could not because it is not so stated in s.25 and that omission was in marked contrast with Paragraph 5 of schedule 11 and the terms of s.73 VAT Act 1994. He then considered the terms of ss. 25 and 80 and paragraph 40 of the VAT Regulations. On that basis the deputy judge reached the conclusion I have quoted in paragraph 4 above. This is to be contrasted with the approach and conclusion of the Chief Registrar I have quoted in paragraph 3 above.

Counsel for HMRC submits that the Chief Registrar was right and the deputy judge was wrong. In relation to the decision and reasoning of the deputy judge his submissions are to the following effect:

Counsel for the Applicant founded himself, as he had to do, on the decision of the deputy judge. He started with the proposition that no VAT was due by the Applicant to HMRC because most of her clients were asylum seekers and ‘belonged’ abroad. He contended that the Chief Registrar was wrong to have assumed that VAT was due and should himself have investigated the alleged liability, not least because it is only the bankruptcy court which has the power to annul a bankruptcy order. He submitted that this was such an exceptional case as Lord Nicholls and Blackburne J recognised in Autologic and Lam respectively. He relied on the cases where the bankruptcy court will go behind a judgment or order for payment of council tax and submitted that VAT was no different.

In my view the approach and conclusion of the Chief Registrar was correct. The ground on which the deputy judge set aside his decision was wrong in law and not open to him on the facts. I reach that conclusion by the following steps. First, in the context of the VAT Act 1994 and subordinate legislation the supplier of services in the United Kingdom is liable to VAT on the value of his supply. This liability is expressed in s.1(2) and 25(1) of the VAT Act 1994 and in paragraph 40(2) of the VAT Regulations. The liability is quantified by the return the taxable person is obliged to make. In particular boxes 1 and 5 constitute a form of self-assessment. It is true that other provisions of the Act and rules specify that in the cases to which they refer HMRC may make an assessment and in some cases that the amount of the resulting assessment is recoverable as a debt. But the converse cannot be correct. Take s.73 - that section permits an assessment in the case of incorrect or incomplete returns. It cannot seriously be suggested that in cases where a complete and correct return has been made there is no liability for the amount shown by the taxable person to be due. It is at the least an admission of a statutory liability for VAT. The returns submitted by the Applicant clearly established the liabilities on which the statutory demand and bankruptcy order were based, no separate point of relevance was taken in respect of the surcharges.

Second, the question whether those returns had been made in error and had overstated the amount of VAT due was clearly referable to HMRC pursuant to Regulation 35 of the VAT Regulations which I have quoted in paragraph 12 above. The Applicant made two voluntary disclosures under that Regulation after the bankruptcy order had been made, namely on 4th July 2006 and 20th August 2009. The first was rejected on its merits the second was out of time. In those circumstances it was not open to the deputy judge to conclude as a matter of fact that the relevant returns had contained errors or overstatements because the Applicant’s clients all belonged abroad. Nor was this such an exceptional case as was recognised by Lord Nicholls and Blackburne J as would entitle the bankruptcy court to entertain the question. Indeed the deputy judge made no mention of either voluntary disclosure nor, save in footnote 12, of the general principle I have considered in paragraphs 16 to 19 above.

Third, it must follow that the legal consequences of the original returns and the unsatisfied statutory demand remain notwithstanding the assertions of the Applicant. Accordingly the Applicant had failed to demonstrate any ground existing on 9th September 2005 for considering that the bankruptcy order against her made by Mr Registrar Rawson on that day should not have been made. It is not appropriate to assume, as both the deputy judge and counsel for the Applicant did, that the relevant facts had been established in favour of the Applicant and then to exercise the jurisdiction which Regulation 35 conferred on HMRC.

I would allow this appeal and restore the order of Chief Registrar Baister.