Conditionaire Energy Savers Ltd & Anor v The Commissioners for HMRC

On 3 November 2020, Conditionaire Energy Savers Ltd (the Company) appealed to the Tribunal against:

On 20 November 2020, Peter Ernest Williams, styled in correspondence as “Colonel P E Williams TD DL” (Mr Williams) (the Company and Mr Williams together the Appellants), appealed to the Tribunal against a Personal Liability Notice issued to him on 21 February 2020 pursuant to Paragraph 19, Schedule 24, Finance Act 2007 as to 100% of the penalty notified to the Company, i.e., £99,797.65 (the PLN) (the Company’s appeal against the s.73 Assessment and the Sched. 24 Assessment and Mr Williams’ appeal against the PLN together the Appeals).

On 3 December 2020, the Tribunal wrote to the Company to notify it that its appeal against the s.73 Assessment could not proceed unless either the tax in dispute was paid or a successful hardship application was made. It appears that the Company did subsequently make a hardship application, which was apparently accepted, so that the tax in dispute remains unpaid pending this decision.

On 14 January 2021, HMRC made an application to the Tribunal to hold a preliminary hearing to determine whether the Company was under any legal constraints in their ability to provide factual evidence about its VAT position (discussed below) or, in the alternative, to strike out the Company’s appeal against the s.73 Assessment under Rule 8 of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (S.I. 2009/273, as subsequently updated) (the Tribunal Rules). That application was refused by Judge Kim Sukul on 21 September 2021 and directions were issued for the case to be prepared for its final determination.

The Appeals were conjoined by Directions issued by the Tribunal on 7 January 2022.

By Directions issued by Judge John Brooks on 15 March 2022, and confirmed in correspondence from the Tribunal to the parties on 15 June 2022, the Appeals were directed to be determined on the papers, without a hearing, as a result of the poor health of Mr Williams, which precluded him taking part in any hearing.

Whilst it appears from some copy e-mail correspondence included in the Tribunal’s bundle that Mr Williams (personally, and/or on behalf of the Company) received at least some professional support from an accountant in 2020, both he and the Company are unrepresented in these appeals. HMRC’s case was prepared by a member of its Solicitors Office, apparently without the support of counsel.

The general lack of evidence (and the relatively poor quality of the evidence which was available), together with the limited legal submissions by both parties, have hampered me in deciding these appeals. Some – or most – of those shortcomings might have been rectified by a hearing, but that had previously been discounted in favour of a decision on the papers because of Mr Williams’ health.

Whilst conscious of that background, I considered whether it was necessary for me to issue new directions under Rules 5(2) and 6 of the Tribunal Rules, superseding the directions issued by Judge Brooks on 15 March 2022, so as to require the holding of a hearing – especially in the context of the overriding objective to deal with cases fairly and justly (at Rule 2(1) of the Tribunal Rules). Ultimately, however, I decided against doing so. That was because: (1) both parties had agreed to the Appeals being determined on the papers; (2) the parties were responsible for the preparation and presentation of their respective cases; and (3) there was no indication that Mr Williams’ health had improved such that he would be able to participate in oral proceedings.

This decision therefore proceeds on the basis of the limited documentary evidence and written submissions received by the Tribunal from the parties.

Among the categories of evidence which could – and in my view should – have been provided to the Tribunal were copies of the relevant Companies House records. As will become apparent below, and having first given careful consideration to the point, I have taken judicial notice of those documents on the basis that they are publicly available statutory records (as did the Queen’s Bench Division (Technology and Construction Court) in Gosvenor London Ltd v Aygun Aluminium UK Ltd [2018] EWHC 227 (TCC), at [27], per Fraser J (affirmed by the Court of Appeal on a different point in [2018] EWCA Civ 2695)).

For the reasons given below, I have decided that the s.73 Assessment, the Sched. 24 Assessment, and the PLN are all upheld and the Appeals are refused.

The Company was incorporated on 26 May 2016. It was described as being in the business of the manufacture and sale of air conditioning energy saving devices. Mr Williams has been the sole director and registered shareholder of the Company since its incorporation; he is listed as the Company’s sole “Person with Significant Control” (for the stated reason that he has the right to appoint and remove directors).

The Company applied for VAT registration on 25 September 2016 on the basis that it intended to make taxable supplies in the future. The application form anticipated zero-rated supplies of £90,000 over the next 12 months, with an estimated turnover over the same period of £100,000. No amounts were specified for the total estimated value of goods bought by the Company and imported from other EU member states, or for sales of goods to other EU member states.

The Company applied to cancel its VAT registration on 21 May 2019, because “…the assets of the Company have been sold to our distributor in the United Arab Emirates and [an] application will be made to Companies House to dissolve the Company.” The application form added that the Company was still trading, but only making supplies which were either exempt or outside the scope of UK VAT, and recorded that the Company stopped making taxable supplies on 29 March 2019 (which was the date of the sale agreement included in the Tribunal’s bundle).

On 12 January 2017, an HMRC officer, Miss Seymour, had sent an e-mail to Mr Williams to enquire into the Company’s VAT return for the period 12/16. She asked:

On the same day, Mr Williams replied by e-mail with the following answers:

On 23 January 2017, Mr Williams wrote back to the HMRC officer to confirm that “the VAT return sent from my office was incorrect. This is due to the fact that the person sending on my behalf was not familiar with the system and, as it was the first return, had nothing to guide him. Future purchases and sales were included prematurely and therefore this revised return results in a repayment.”

HMRC wrote to the Company on 24 January 2017, and concluded that the Company was “not entitled to a VAT credit for this period, so no credit will be applied to your account. Instead, there is now an amount of VAT due.” HMRC accordingly issued an assessment under s.73 VATA in the amount of £110.71. It does not appear that penalties were applied because of that inaccuracy.

On 18 June 2019, a different officer of HMRC, Mr Jason Michej, sent an e-mail to Mr Williams to arrange an inspection of the Company’s VAT records at the Company’s premises. Mr Michej wrote, "I appreciate that prior to the end of May you had applied for VAT de-registration. You may be aware that VAT records need to be kept for 6 years.” Mr Michej notified Mr Williams that he required sight of “purchase and sales invoices, as well as bank records and other supporting documents” relating to the Company’s VAT returns.

For the reasons discussed below, and despite repeated attempts by HMRC to encourage and enable compliance (including the offer of a confidential meeting, requests for alternative sources of corroborative information, and, finally, on 9 October 2019, a formal information notice issued pursuant to Schedule 36, Finance Act 2008), Mr Williams remained unable or unwilling to provide HMRC with the documentary evidence they required. As at the date of this decision, none of the Company’s VAT records (or other corroborative evidence) have been produced to HMRC or the Tribunal by the Company or Mr Williams.

Accordingly, HMRC issued the Company with the s.73 Assessment and the Sched. 24 Assessment, and Mr Williams with the PLN.

Mr Williams wrote to HMRC on 9 March 2020 (though the letter was mis-dated 9 February) to request an independent HMRC review of the s.73 Assessment and the Sched. 24 Assessment.

Following the conclusion of HMRC’s review of the s.73 Assessment and the Sched. 24 Assessment by Ms Rachel Smith of HMRC, Ms Smith wrote to the Company on 22 August 2020 to confirm that she had upheld the same. It was the decisions in that letter which were amenable to appeal by the Company.

The ordinary appeal deadline was 30 days from the date of the review letter, i.e., 22 September 2020. But as a result of the Covid-19 pandemic, HMRC took the general position that it would not object to late appeals made within 3 months of the end of the normal 30-day appeal period, i.e., in this case, by 22 December 2020.

The Appeals were made out of time, but within HMRC’s 3-month ‘grace period’. HMRC have therefore not objected to the late appeals, and I have allowed them to proceed (applying Martland v HMRC [2018] UKUT 178) because of: (1) the general social conditions then occurring as a result of Covid-19; and (2) Mr Williams’ reported state of health.

In their Statement of Case, HMRC correctly identified that the burden of proof is on the Company in respect of the s.73 Assessment, but that the burden of proof is on them in respect of the Sched. 24 Assessments and the PLN, and that the standard of proof in each case is the civil standard, i.e., on the balance of probabilities. The Appellants have not addressed the burden or standard of proof.

In the context of this case, HMRC’s brief statement on these points requires expanding as follows.

The s.73 Assessment was made pursuant to s.73(1), which provides:

In the absence of any evidence having been provided by the Company to substantiate the input tax claimed in its VAT returns, Mr Michej notified the Company that he exercised his “best judgment” in determining the amount of this assessment. Mr Michej explained how he reached that amount in the notice of assessment dated 12 February 2020 and in its enclosed spreadsheet, which showed his calculations.

The onus is on the Company to displace the s.73 Assessment by providing evidence which proves to the Tribunal’s satisfaction (on the balance of probabilities – see below) that the assessment is incorrect. If relevant, that includes the burden of showing that the assessment was not, in fact, made to the best of Mr Michej’s judgment (Bustard v. HMRC [2015] UKFTT 546 (TC), at [2]).

It has been held that a ‘fundamental’ defect is required so as to invalidate an assessment (Pegasus Birds Ltd v. CEC [2004] EWCA Civ 1015, per Walker, Chadwick and Carnwath LJJ), and, in Mithras (Wine Bars) Ltd v Revenue & Customs Commissioners [2010] UKUT 115 (TCC) (Judge Sir Stephen Oliver), that “[t]he circumstances in which the Tribunal can decide that the assessment was not raised to the best of the Commissioners' judgment, and therefore should not have been made at all, are very limited, essentially being restricted to cases where the Commissioners have acted perversely or in bad faith” (applied in Morrella Ltd v. HMRC [2017] UKFTT 13 (TC) (Judge Jonathan Richards), at [96(2)]). Innocent mistakes (i.e., those which are not perverse or made in bad faith) do not make the assessment void: Foneshops Ltd v. HMRC [2015] UKFTT 410 (TC) (Judge Barbara Mosedale), at [78].

Conversely (for the reasons summarised in paragraphs [35]-[37] below), the burden of proof is on HMRC in respect of the Sched. 24 Assessment and the PLN. HMRC accept that, writing in their Statement of Case: “In regards to [sic] the penalty, the burden is on HMRC to demonstrate that the penalties are due and correctly issued as deliberate and concealed.”

In respect of the Sched. 24 Assessment (to which the PLN is appendant), there are thus two primary elements which HMRC must prove:

It is trite law that there is only one standard of proof in civil cases: that being the balance of probabilities. However, that is not the end of the matter. Phipson on Evidence says this at §6-57:

Tax-geared penalties are quasi-criminal, e.g., for the purposes of Article 6 of the European Convention on Human Rights – see, for example, Han & Yau Martins & Martins Morris v Commissioners of Custom and Excise [2001] EWCA Civ 1048; King v Walden (Inspector of Taxes) [2001] STC 822 (per Jacob J), at paras 62–79. Penalties levied on the basis that the alleged conduct of the taxpayer was “deliberate” (and “concealed”) are especially grave – essentially the equivalent of an allegation of fraud, albeit dealt with by this Tribunal and not the criminal courts (indeed, until 1 April 2010, the statutory language referred to “fraudulent”, instead of “deliberate”, conduct).

Although the cases cited in [36] above do not deal with penalties under Sched. 24 FA2007 (which, for VAT purposes, largely came into force for periods after July 2008), I consider it axiomatic that a penalty under Sched. 24 ought to be treated as criminal in nature, especially where the penalty is imposed for allegedly “deliberate and concealed” behaviour. The consequences of that are that the rights granted under Article 6 of the ECHR apply in relation to the penalties assessed. Relevantly here, Article 6(1) gives the Appellants the right to a fair trial, and Article 6(2) provides that there is a presumption of innocence until they are proven guilty (to the civil standard of the balance of probabilities).

Furthermore, this Tribunal, when assessing whether the standard of proof has been met, should be careful to ensure it is satisfied that it has “cogent evidence” of the salient facts. It is for me, in my evaluative judgment, to determine what is “cogent evidence” in this context.

In respect of the s.73 Assessment (i.e., an appeal brought under s.83(1)(p)), the Tribunal has a general review jurisdiction, giving power to increase the amount specified in the assessment if it determines that that amount “is less than it ought to have been” provided that a direction is given specifying the correct amount: s.84(5).

In respect of the Sched. 24 Assessment and the PLN, the Tribunal’s jurisdiction arises from paragraph 15, Sched. 24 FA2007, relevantly:

As set out in paragraph 17, Sched. 24, FA2007, the Tribunal’s jurisdiction varies according to which paragraph or paragraphs the Appellants’ appeals are made under:

If the appeal is made under paragraph 15(2) Sched. 24, FA2007 then the Tribunal has a general supervisory power under paragraph 17(2)(b), Sched. 24, FA2007, enabling it to decrease or increase the amounts specified in the penalty notices as required by the facts found by the Tribunal. Otherwise, on an appeal under paragraph 15(1) Sched. 24, FA2007, the Tribunal’s power is simply to affirm or cancel the penalty issued by HMRC.

I have reviewed the Appellants’ Grounds of Appeal to ascertain under which paragraph or paragraphs the appeals against the Sched. 24 Assessment and the PLN were brought. Mindful that the Appellants are unrepresented (thus there being a risk that they have not articulated their grounds of appeal so precisely as an expert professional would have done), I have also carefully reviewed the correspondence and documents in the Tribunal’s bundle to the same end.

The Grounds of Appeal make no mention of any appeal against the amounts of the various assessments. Insofar as I have been able to tell from the material before me, an objection to the amounts of the Sched. 24 Assessment and/or the PLN (as distinct from the fact that HMRC issued them at all) seems never to have formed part of the Appellants’ case. It follows, in my judgment, that the Appeals against the Sched. 24 Assessment and the PLN are to be construed as if they were made only pursuant to para. 15(1) Sched. 24, FA2007, and not also pursuant to para. 15(2) of the same. As a result, I have concluded that the Tribunal’s only powers in respect of the Sched. 24 Assessment and the PLN are either to: (1) affirm them in their stated amounts; or (2) cancel them in their entirety. The Tribunal has no power to vary their amounts as it would have done had I concluded that the Appeals had also been brought under para. 15(2) Sched. 24 FA2007.

The evidence available to the Tribunal consists chiefly of: a Witness Statement (with exhibits) by Mr Michej of HMRC; copies of correspondence between the parties (and occasionally with others, chiefly the Appellants’ tax advisor); internal HMRC correspondence; various HMRC forms and computer records relating to the Company; HMRC’s earlier application to the Tribunal; and the Sale Agreement and associated documents, including a Stock Transfer Form dated 29 March 2019 (the STF).

I have reviewed and considered all the documentary material available to me. As noted at [11] above, I have also taken account of the relevant Companies House filings.

The essential issue is helpfully set out in Mr Michej’s Witness Statement as follows:

I have reviewed the spreadsheets exhibited to Mr Michej’s Witness Statement, which substantiate these points.

So the fundamental factual question which the Tribunal must determine is whether or not the Company did in fact make those supplies – especially of the zero-rated non-export sales of £720,140 during the relevant period as claimed in its VAT returns. HMRC’s ‘best judgment’ s.73 Assessment was issued on the basis that the Company has failed to provide the documents and information required to ‘verify’ its returns, and so HMRC disallowed the input tax claimed.

Because the burden of proof is on HMRC, the Appellants are not under any obligation to provide any positive evidence in support of their case: they may, if they prefer, “put HMRC to their proof”, in which case the outcome of the case will depend upon whether HMRC have met their burden.

Of course, in general terms, it is far easier for a Tribunal to find in favour of appellants if they do adduce positive evidence which seeks to undermine HMRC’s case and which can potentially introduce the necessary level of doubt in the Tribunal’s mind such that the Tribunal would have to decide that HMRC has failed to meet its burden.

In this case, the Appellants – either by choice or necessity (they say the latter) – have adduced almost no positive evidence: indeed, their case is predicated on the unavailability of the relevant evidence as a result of the Company’s records having been transferred to Envirotech Limited of Abu Dhabi (Envirotech) pursuant to a sale agreement dated 29 March 2019 (the Sale Agreement) – a copy of which was included in the Tribunal’s bundle.

In essence (and putting HMRC’s case and the evidence they have supplied in support to one side for a moment), the Appellants seem to be asking the Tribunal to take on trust that the Company’s VAT returns were correct, notwithstanding the lack of corroborative evidence.

In that context, the Tribunal’s view of the Appellants’ credibility plays a part in its deliberations. In particular, an appellant’s evidence-in-chief and on cross-examination can be instrumental in helping the Tribunal to form a view of the respective merits of the parties’ cases. It is, then, particularly regrettable that the Tribunal has not had the benefit of an oral hearing in these Appeals. In lieu of that, I have had to come to a view on the Appellants’ reliability on the papers before me alone.

The Appellants have said throughout that it was not possible to provide the Company’s records to substantiate the input tax amounts claimed because of the terms of the Sale Agreement. However, even if that is the case, there is nothing preventing the Appellants from making a narrative statement setting out in broad terms the nature of its sales and explaining the circumstances in which the Company made its supplies – especially of the zero-rated non-export sales amounting to £720,140. From what I can determine of the Company’s trade as a whole, those sales would have been the largest part of the Company’s business.

Other than dormant company accounts for the period 1 September 2019 to date, the Company only filed substantive statutory accounts with Companies House for two financial periods, between 26 May 2016 and 31 August 2018. Those accounts were prepared on the basis that the Company qualified for the “micro-entity” reporting basis (requiring that it had two or more of the following: a turnover of £632,000 or less; £316,000 or less on its balance sheet; 10 employees or fewer). As far as can be ascertained from the simplified balance sheets in the Company’s filed accounts, its trade seems to have been negligible. There is certainly no information in the accounts which credibly substantiates the claims in its VAT returns that it made taxable UK supplies of £2,480, export supplies of £40,915 to Mexico, Brazil, Israel and the USA, and other zero-rated non-export sales of £720,140. It is worth noting in passing that these amounts are considerably greater than the more modest estimates provided in September 2016 when the Company applied for VAT registration with an anticipated annual turnover of £100,000 (see [14] above).

In the above context, I find it impossible to believe that Mr Williams is incapable of describing how the purported zero-rated non-export sales arose – irrespective of whether or not he is able to substantiate his narrative with corroborative documents. The lack of any attempt to do so is especially striking. Absent any evidence to persuade me otherwise, I find it inherently improbable that the Company could have made such substantial zero-rated non-export supplies in the context of its overall trade.

The Appellants’ case, as put in their Grounds of Appeal, is that:

The Sale Agreement was included in the Tribunal’s bundle, as a copy of it was evidently belatedly supplied by Mr Williams to HMRC.

There are several notable features and oddities about the Sale Agreement:

It may be the case that asset sale and purchase agreements in the form of the Sale Agreement are unexceptional in UAE law: this Tribunal is not in any position to judge that one way or the other. But by comparison with typical English law examples, the Sale Agreement seems to me to be a conspicuously poor document. Whilst it is not impossible that a company might conceivably conclude a contractual agreement in such a form, especially in extremis, it would be so unwise as to invite explanation. Unfortunately, no explanation of the Sale Agreement or its circumstances has been provided by the Appellants.

Adding to the confusion is that fact the STF accompanies the Sale Agreement, even though the Sale Agreement itself is expressed to be in respect of the Company’s intellectual property rights in the “Aircon Energy Saver” rather than over Mr Williams’ shares. The STF, which is dated 29 March 2019 (in common with the Sale Agreement), purports to transfer Mr Williams’ shares in the Company to Envirotech. The STF is defective in two respects: first, it does not specify the consideration money for the transfer; secondly, the signature box which Mr Williams was required to complete to authorise the transfer of his shares is instead completed with the words “ENVIRO-TECH LIMITED – UAE” (in block capitals). Mr Williams has, though, clearly seen the STF, as he signed the Stamp Duty exemption certificate on the reverse (as “Transferor”). I note in passing that a somewhat idiosyncratic use of block capitals seems to be typical of Mr Williams’ written style (e.g., in respect of product names), found variously in the Grounds of Appeal and in correspondence. It is also – coincidentally or otherwise – a feature of both the Sale Agreement and the STF.

The inclusion of the STF is presumably intended to demonstrate that the transfer of Mr Williams’ shares in the Company to Envirotech was a term of the Sale Agreement – which has been Mr Williams’ case throughout, despite the apparently clear terms of the Sale Agreement itself to the contrary. Nevertheless, it is clear that the STF has never been registered, as Mr Williams still remains the sole registered shareholder – even though Mr Williams, as the Company’s sole director, had absolute control over the company enabling him to act as he saw fit, including by registering the apparent transfer of shares to Envirotech. It is telling that in his correspondence with his tax adviser, Mr Williams apparently considered himself able to put the Company into liquidation – seemingly without the involvement of Envirotech, for whom (if we are to believe him that the Sale Agreement was in respect of his shares in the Company) he presumably held the shares on bare trust. As a result, I doubt that the STF was required or intended by the Sale Agreement and its inclusion is question-begging.

HMRC’s application to the Tribunal of 14 January 2021 raises another point which calls for explanation: HMRC alleged that “Envirotech Limited” had an office in the UK, located in Tunbridge Wells, of which a “Mr Paul Williams” and a “Mrs Rania Baker Williams” (whom I infer to be the same person as the Rania Abo Baker who signed the Sale Agreement on behalf of Envirotech) were directors. Additionally, as HMRC went on to note, Mr Williams, “Paul David Williams”, and “Rania Abo Baker Williams” were all co-directors of another company, Green Park Consultancy Limited, which had its registered office in Sevenoaks. The filing address for Mr Williams and “Rania Abo Baker Williams” was the same.

It is possible that it is a simple coincidence that all or some of Mr Williams, Paul David Williams, and Rania Abo Baker Williams apparently share a name and addresses and have directorships of multiple companies in common. In the absence of further evidence, it is impossible to tell. But whatever the actual circumstances of the Sale Agreement, it seems a reasonable inference to draw from the Companies House records that there may be more to the relationship between Mr Williams and the “Rania Abo Baker” who signed the Sale Agreement on behalf of Envirotech than the Appellants have acknowledged in these Appeals, and an explanation is, in my view, called for – though none has been provided.

Having set out the evidence above, I briefly return to this point at [76] below.