CF Booth Limited v The Commissioners for HMRC

There follow relevant extracts from paragraphs 1, 4, 4A, 9, 10 and 11 of Schedule 24:

1.

(1) A penalty is payable by a person (P) where –

(a)

P gives HMRC a document of a kind listed in the Table below, and

(b)

conditions 1 and 2 are satisfied.

(2)

Condition 1 is that the document contains an inaccuracy which amounts

to, or leads to –

(a)

an understatement of a liability to tax,

(b)

a false or inflated statement of a loss, or

(c)

a false or inflated claim to repayment of tax.

(3)

Condition 2 is that the inaccuracy was careless (within the meaning of

paragraph 3) or deliberate on P’s part.

(4)

Where a document contains more than one inaccuracy, a penalty is payable

for each inaccuracy.

Tax	Document
…	…
VAT	VAT return under regulations made under paragraph 2 of Schedule 11 to VATA 1994
VAT	Return, statement or declaration in connection with a claim
…	…

4.

(1) This paragraph sets out the penalty payable under paragraph 1.

(2)

If the inaccuracy is in category 1, the penalty is—

(a)

…

(b)

for deliberate but not concealed action, 70% of the potential lost revenue, and

(c)

…

(5)

Paragraph 4A explains the 3 categories of inaccuracy.

4A. (1) An inaccuracy is in category 1 if— (a) it involves a domestic matter…

9.

(A1) Paragraph 10 provides for reductions in penalties—

(a)

under paragraph 1 where a person discloses an inaccuracy that involves a domestic matter,

…

(A3) Sub-paragraph (1) applies where a person discloses—

(a)

an inaccuracy that involves a domestic matter,

…

(1)

A person discloses the matter by—

(a)

telling HMRC about it,

(b)

giving HMRC reasonable help in quantifying the inaccuracy …, and

(c)

allowing HMRC access to records for the purpose of ensuring that the inaccuracy … is fully corrected.

(2)

Disclosure—

(a)

is “unprompted” if made at a time when the person making it has no reason to believe that HMRC have discovered or are about to discover the inaccuracy …, and

(b)

otherwise, is “prompted”.

(3)

In relation to disclosure “quality” includes timing, nature and extent.

10.

(1)If a person who would otherwise be liable to a penalty of a percentage shown in column 1 of the Table (a “standard percentage”) has made a disclosure, HMRC must reduce the standard percentage to one that reflects the quality of the disclosure.

(2)

But the standard percentage may not be reduced to a percentage that is below the minimum shown for it—

(a)

in the case of a prompted disclosure, in column 2 of the Table, and

(b)

...

Standard %	Minimum % for prompted disclosure	….
…	…	…
70%	35%	…
…	…	…

11.(1) If they think it right because of special circumstances, HMRC may reduce a penalty under paragraph 1 ...

(2)

In sub-paragraph (1) “special circumstances” does not include—

(a)

ability to pay, or

(b)

the fact that a potential loss of revenue from one taxpayer is balanced by a potential over-payment by another.

(3)

...

The penalties amount to a criminal penalty and therefore engage the protection of Article 6 of the European Convention on Human Rights.

The burden of proof accordingly fell on HMRC.

Barry Edwards v HMRC [2019] UKUT 131 (TCC) concerned late filing penalties under Schedule 55 to Finance Act 2009, which, at paragraph 16, contains provisions on special circumstances that are very similar to paragraph 11 of Schedule 24. Concerning these, the Upper Tribunal cited and agreed with the statement made by Judge Vos in Advanced Scaffolding (Bristol) Limited v HMRC [2018] UK FTT 744 (TC):

“[101] I appreciate that care must be taken in deriving principles based on cases dealing with different legislation. However I can see nothing in schedule 55 which evidences any intention that the phrase “special circumstances” should be given a narrow meaning.

[102] It is clear that, in enacting paragraph 16 of Schedule 55, Parliament intended to give HMRC and, if HMRC's decision is flawed, the Tribunal a wide discretion to reduce a penalty where there are circumstances which, in their view, make it right to do so. The only restriction is that the circumstances must be “special”. Whether this is interpreted as being out of the ordinary, uncommon, exceptional, abnormal, unusual, peculiar or distinctive does not really take the debate any further. What matters is whether HMRC (or, where appropriate the Tribunal) consider that the circumstances are sufficiently special that it is right to reduce the amount of the penalty.”

The Upper Tribunal also noted that the FTT there went on to say that special circumstances may or may not operate on the person involved but what is key is whether the circumstance is relevant to the issue under consideration.

The Upper Tribunal said in Marano v HMRC [2023] UKUT 113 (TCC) (at [138]) that “proportionality might, where a tax-geared penalty is levied, be a special circumstance depending on the particular facts of that case.”

HMRC submitted that the reductions to reflect the quality of CFB’s disclosure of the inaccuracies were “ample”, given that CFB knew its transactions were connected with the fraudulent evasion of VAT – so rendering its VAT returns inaccurate – yet CFB did not tell HMRC about this.

HMRC accepted that CFB “generally co-operated” (and that this was reflected in the reductions provided). But in “several important instances” CFB was “reticent” to provide information and documents, delayed doing so, and in some instances “sought to mislead” HMRC.

HMRC submitted that the penalties were not disproportionate:

(1)

[77]-[80] of the Upper Tribunal’s decision (see [15] above) “determined” that the penalties were “not disproportionate in principle”

(2)

Schedule 24 was a “proportionate” penalty scheme; and for such a scheme to produce a disproportionate penalty in an individual case is only likely in a wholly exceptional case, dependent upon its own particular circumstances: see HMRC v Trinity Mirror [2015] UKUT 421 (TCC) at [66]; and there is nothing exceptional about CFB’s case.

HMRC submitted that there was no judicial review type flaw in HMRC’s decision-making.

CFB submitted that HMRC received “full and exemplary cooperation” from CFB: reference was made to Mr Ratcliffe saying at paragraph 46 of his first witness statement that if HMRC requested records or information by email, he generally sent it straight away; and at paragraph 52, to his saying that CFB aimed to respond in a timely manner to all requests for information during HMRC’s verification process.

CFB cited the following as showing the degree of cooperation with HMRC:

(1)

an HMRC email thanking CFB for forwarding some invoices “so promptly” (5 December 2013)

(2)

HMRC saying at a meeting that they appreciated CFB’s cooperation (18 February 2014 meeting) and that they greatly appreciated a list sent to them.

CFB submitted that it could not be criticised for not holding stock records, as this was commercially driven. As Mr Ratcliffe said, CFB have never kept detailed stock records and/or product trail, and it is not realistically sensible in CFB’s business to do that (paragraph 59).

CFB submitted that there was no suggestion that CFB had incomplete or inaccurate records of its transactions; or that relevant information was withheld from HMRC.

CFB submitted that it told HMRC the identity of all its suppliers and nature of its trading with them.

CFB submitted that the maximum reduction for prompted disclosure should have been applied, under paragraph 10 of Schedule 24, because CFB was “open” with HMRC through out: it told HMRC about the transactions, helped HMRC to quantify the sums in issue, and made its records and documents fully accessible to HMRC.

CFB submitted that the penalties were raised at a time when VAT law in the UK was fully subject to European VAT law, and on an appeal the lawfulness and amount of the penalty should be determined by reference to the law applicable at that time. It submitted that s6 of the European Union (Withdrawal) Act 2018 provides that judgments of the Court of Justice of the EU (“CJEU”) made before 1 January 2021 are binding on UK courts.

CFB submitted that European VAT law carries an inherent requirement of proportionality. CFB cited Lord Hoffmann in C R Smith Glaziers (Dunfermline) Limited v C&E Comrs [2003] UKHL 7 at [25] (in the context of discussing what conditions would be appropriate in domestic legislation (enacting a EU directive) as being justifiable to prevent evasion, avoidance or abuse), as follows:

“25.

... But in general European law would require them to satisfy the principle of proportionality in its broad sense, which, following German law, is divided into three sub-principles: first, a measure must be suitable for the purpose for which the power has been conferred; secondly, it must be necessary in the sense that the purpose could not have been achieved by some other means less burdensome to the persons affected and thirdly, it must be proportionate in the narrower sense, that is, the burdens imposed by the exercise of the power must not be disproportionate to the object to be achieved. In the particular instance of conditions for allowing a VAT exemption, the Court of Justice has recently said that such conditions must be "necessary for the attainment of the specific objective which [the legislation] pursues and have the least possible effect on the objectives and principles of the Sixth Directive": Ampafrance SA v Directeur des Services Fiscaux de Maine-et-Loire (Joined cases C-177 and 181/99) [2000] ECR I-7013, 7074, para 60.”

CFB cited Case C-712/17 EN.SA Srl v Agenzia delle Entrate, where the CJEU considered the question of whether a fine in an amount equal to the amount of the improperly deducted VAT was compatible with the VAT principles of proportionality, and held:

“40.

In the first place, in order to assess whether a penalty is consistent with the principle of proportionality, account must be taken of, inter alia, the nature and the degree of seriousness of the infringement which that penalty seeks to sanction, and of the means of establishing the amount of that penalty (judgment of 26 April 2017, Farkas, C‑564/15, EU:C:2017:302, paragraph 60 and the case-law cited).

41.

In that regard it should be noted that, in the present case, for the purpose of ensuring the correct collection of VAT and preventing evasion, national law provides for the imposition of a fine, the amount of which, rather than being calculated according to the taxable person’s tax liability, is equal to the amount of tax which he has improperly deducted. Since the tax liability of a person subject to VAT is equal to the difference between the output tax payable on the goods and services supplied and the deductible input tax relating to the goods and services received, the amount of tax improperly deducted does not necessarily correspond to that liability.

42.

That is particularly the case in the dispute in the main proceedings. As the Advocate General noted in point 63 of her Opinion, since EN.SA. bought and sold, fictitiously, the same quantities of electricity at the same price, its VAT liability for those transactions was zero. In that situation, a fine equal to the full amount of the input tax improperly deducted, imposed without taking account of the fact that the same amount of output VAT had been duly paid and that the Treasury had not, as a result, lost any tax revenue, constitutes a penalty that is disproportionate to the objective which it pursues.”

CFB noted that in Farkas, the CJEU found (at paragraph 65) that

“the infringement consists of an error relating to the application of the VAT mechanism, which is an infringement of an administrative nature and which, in view of the information in the case file sent to the Court, first, did not cause the tax authority any loss of revenue, and secondly, shows no evidence of fraud”

CFB submitted that there is no express mechanism in Schedule 24 for the requirement for proportionality to be taken into account; but, in relation to a VAT penalty, it must be taken into account.

CFB submitted that, as was the position in Farkas, there has been no net loss of revenue to HMRC, and no fraud committed by CFB, so that a 50% penalty (as against the penalty percentage of 52.5% for the penalties in respect of the Kittel inaccuracies) would be disproportionate and harsh.

CFB stressed the following:

(1)

although CFB was found to have had knowledge of the connection to fraudulent VAT evasion, CFB was not itself the fraudulent party; CFB noted that HMRC had neither pleaded nor proved that CFB was fraudulent;

(2)

CFB bore the cost of the frauds by others: it has been denied recovery of input tax which it incurred; HMRC never repaid that input tax to CFB;

(3)

HMRC have the ability under Kittel to withhold and/or recover input tax from every trader in the relevant ‘supply chains’; publicly available documents, namely the First-tier and Upper Tribunal decisions in Sandham (t/a Premier Metals Leeds) v HMRC [2019] UKFTT 218 (TC) and [2020] UKUT 193 (TCC), show that HMRC have done that in relation to at least one of CFB’s direct suppliers, Premier Metals Leeds;

(4)

it follows that where HMRC have pursued that right, HMRC have made not a VAT loss, but in fact a net gain out of the circumstances in question: i.e. in the case of Premier Metals Leeds and its relevant transactions with CFB, HMRC have made a double recovery;

(5)

it is inherently disproportionate and contrary to the VAT principle of neutrality that HMRC should both deny input tax to a trader (such as Premier Metals Leeds) and at the same time treat its corresponding supplies (such as supplies to CFB) as subject to output tax, and then in turn deny input tax to CFB on those same transactions, while collecting output tax from CFB on its corresponding outputs.

CFB argued that it was significant that HMRC had not made payments to CFB on the basis of the Kittel inaccuracies contained in CFB’s VAT returns (due to their concerns about those inaccuracies); in other words, the “PLR” in respect of the Kittel inaccuracy penalties was the sum that HMRC would have had to pay, had those inaccuracies had not been corrected.

CFB submitted that the overall size of the penalties is very large and will be “financially crippling” to CFB; the penalties related to matters of some age, which, CFB submitted, are “unlikely to be repeated” – CFB now “does not trade in the same way”. CFB, it said, had already “suffered greatly”, by having its input tax claims denied. It submitted that it was not now “in the public interest” to damage CFB’s business further by imposing the penalties, “threatening a long-standing British industrial company and the livelihoods of 300 employees”.

For all these reasons, CFB submitted, the penalties are disproportionate and/or there are special circumstances so that they ought to be reduced, being circumstances which HMRC should have considered but did not.

CFB also made arguments based on s69C, inserted into Value Added Tax 1994 by Finance (No 2) Act 2017 with effect from 16 November 2017 (it did not, however, apply in relation to transactions (like the ones in this appeal) entered into before that date). Section 69C imposes liability to a penalty for transactions connected with VAT fraud of 30% of the potential lost VAT. By reason of subsection (12), a s69C penalty may not be imposed where the actions concerned have given rise to a Schedule 24 penalty. Prior to the enactment of s69C, HMRC had published a consultation document Penalty for participating in VAT fraud (on 28 September 2016); in the section headed “Option A – a fixed rate penalty”, this document stated

3.3.

The rationale for a 30% rate is that it is within the overlap of ranges of the current Schedule 24 penalty for both careless and deliberate inaccuracies …

…

3.13.

This option is consistent with the wider penalties principles outlined in the introduction. We believe a 30% rate is proportionate to the non-compliance, penalises those that participate in VAT fraud and provides a credible deterrent to others.

3.14.

Distinguishing between careless and deliberate behaviours can be difficult, so a flat rate penalty would lead to a consistent and standardised approach where the knowledge principle is applied. It would also be more cost-effective than the status quo.

CFB argued that the 30% penalty percentage in s69C meant that the (higher) penalty percentages used for the penalties were disproportionate; it also argued that it was a “special circumstance” for Schedule 24 penalties to be imposed for the Kittel and zero rating inaccuracies after the enactment of s69C, given the policy rationale for enacting s69C.

CFB criticised HMRC’s 4 May 2018 decision (read with their “penalty intention letter” of 16 February 2018), saying that there was no evidence that HMRC “actively” considered whether there were special circumstances in this case and, even if they did, no evidence explaining what circumstances they did or did not consider. CFB submitted that HMRC’s decision was also flawed due to inadequate reasons being given. CFB also submitted that the internal HMRC emails from July 2018 (put into evidence after the hearing, with the Tribunal’s permission) show HMRC misunderstanding arguments made by EY in a letter of 12 June 2018 (about s69C and about the “procedural consequences” of the penalties having been raised only after time had expired for CFB to seek permission to appeal against the decision of the FTT in 2017). CFB submitted that HMRC’s decision of 4 May 2018 was flawed because it did not take into account the arguments EY would raise in its 12 June 2018 letter.

CFB also argued that the HMRC’s decision on special circumstances was flawed because the reconsideration by the HMRC team with ultimate responsibility, prefigured in the “reconsideration” letter of 13 September 2018, did not in fact take place; and this was contrary to CH170100 in HMRC’s internal manual Compliance Handbook, which states that “if you have refused to make a special reduction and the person challenged that refusal, you must refer to the Specialist Technical Team …”.

This appeal concerns two possible reductions to the penalties under Schedule 24, in exercise of the Tribunal’s powers to substitute for HMRC’s decision another decision HMRC had power to make – paragraph 17(2):

(1)

reduction in the penalty percentage, to one reflecting the quality of CFB’s disclosure of the inaccuracies in its VAT returns (this is paragraph 10)

(2)

reduction considered right because special circumstances (this is paragraph 11) – but only if the Tribunal thinks that HMRC’s decision in respect of the application of paragraph 11 was flawed – paragraph 17(3).

It is also about whether quantum of the penalties was proportionate (that ‘proportionality’ was an issue before the Tribunal was common ground between the parties, and, indeed, reflects the Upper Tribunal decision cited at [15] above).

The essential context for consideration of these matters is that

(1)

CFB’s VAT returns contained inaccuracies: namely, the Kittel inaccuracies and the zero rating inaccuracies; and

(2)

those inaccuracies were deliberate on CFB’s part, but not concealed.

The scheme of Schedule 24, in the context of the facts of this case, is to penalise those who deliver VAT returns to HMRC containing inaccuracies (where those inaccuracies understate liability to VAT or inflate claims to repayment of input tax). To attract a penalty, the inaccuracy must be either careless or deliberate. The amount of the penalty is a proportion (expressed as a percentage) of “the potential lost revenue” or “PLR”, meaning (here) the additional amount due or payable in respect of tax as a result of correcting the inaccuracy. The legislation (paragraph 5(2)) states that the italicised wording includes

(1)

an amount payable to HMRC having been erroneously paid by way of repayment of tax, and

(2)

an amount that would have been repayable by HMRC had the inaccuracy not been corrected.

Where (as here) the inaccuracy in the VAT return made by the taxpayer is deliberate (but not concealed), and there has been prompted disclosure of the inaccuracy, the penalty percentage under Schedule 24 is between 35% and 70%, depending on the quality of that disclosure. If the inaccuracy had been careless, the penalty range (with prompted disclosure) would have been 15% to 30%; if the inaccuracy had been concealed as well as deliberate, the range would have been 50% to 100%.

Schedule 24 also provides for penalties to be reduced, where it is right to do so because of special circumstances (paragraph 11).

The relevant period, in our view, for assessing the quality of CFB’s disclosure of the Kittel and zero rating inaccuracies, is from the submission of the VAT returns containing the inaccuracy, to the raising of the assessments by HMRC correcting, or reversing, the inaccuracy. So:

(1)

for the zero rating inaccuracies, it is the period from October 2012 to July 2014

(2)

for the Kittel inaccuracies, it is the period from March 2013 to March 2015.

We had considerable documentary evidence before us of the quality of CFB’s disclosure of the inaccuracies in these periods, in the form of correspondence between CFB and HMRC and notes of meetings between CFB and HMRC. As for witness evidence, of the three witnesses who gave evidence, Officer Lewis had no role in those CFB/HMRC interactions; Mr Booth had a very limited role in them; and Mr Ratcliffe played a significant role. However, given that the interactions took place around a decade before the hearing (i.e. a very long time ago), we placed significantly greater weight on the documentary evidence than on any of the witness evidence; moreover, the question of the quality of disclosure is a matter of judgement for the Tribunal (albeit one based on the Tribunal’s factual findings, based on evidence, as to what “disclosure”, in the sense intended by the statute, actually took place).

Based on the evidence, we find as follows:

(1)

the interactions between CFB and HMRC can be summarised thus: HMRC was undertaking an investigation, principally to see whether the Kittel principle applied to any of CFB’s purchases on which it incurred input tax; it was HMRC taking the initiative to ask questions and reach conclusions on the basis of the answers given by CFB; the interactions were part of a process whereby HMRC “verified” the position in CFB’s VAT returns; CFB was generally co-operative in its providing answers (including documentation from its records) to HMRC’s investigative questions, although it did on occasion raise commercially-based reasons as to why it could not respond to the question as asked, or needed more time; however, CFB was not the ‘initiative-taker’ or the ‘conclusion-drawer’ in these interactions – its position was the more ‘passive’ one of responding to HMRC’s questions as HMRC sought to satisfy itself of the accuracy of CFB’s tax returns; and at no point did CFB tell HMRC that it knew of fraudulent VAT evasion in the relevant supply chains;

(2)

there is thus no evidence of CFB telling HMRC about the Kittel or the zero rating inaccuracies; rather, the tenor of CFB’s interactions with HMRC in the relevant periods, on the evidence before us, was that CFB stood by the accuracy of its submitted VAT returns;

(3)

CFB did help HMRC quantify the Kittel and zero rating inaccuracies, in the sense that it responded with a reasonable degree of cooperativeness to HMRC’s questions, which led to them quantifying the inaccuracies; albeit that the tenor of this “help” was indirect, in the sense that it was not expressed as help in quantifying the inaccuracies, and passive, in the sense that the nature and timing of the help was dictated by HMRC’s questions; the “help” was not therefore ‘proactive’; the reason being that CFB did not acknowledge the inaccuracies contained in its VAT returns;

(4)

CFB did allow HMRC access to its records for the purpose of ensuring that the inaccuracies were fully corrected (this being HMRC’s purpose at the time, rather than CFB’s); the tenor of this was indirect and passive, in the senses (and for the reasons) explained immediately above.

Based on the findings above, we find that the quality (including timing, nature and extent) of CFB’s disclosure of the Kittel and zero rating inaccuracies was distinctly “so-so” (by which we mean “basic” quality as opposed to “high” quality or “poor” quality):

(1)

CFB did not tell HMRC about the inaccuracies; it responded to HMRC’s queries and left it to HMRC to find the inaccuracies;

(2)

on the other hand, CFB was generally co-operative in providing what HMRC asked for; there were, however, certain things that CFB said it would not do or provide, for commercial reasons such as resources or concerns about confidentiality;

(3)

CFB was in no sense ‘proactive’ in its disclosure of the inaccuracies; it responded to questions and requests from HMRC; had CFB tried to anticipate HMRC’s questions, help and information could have been provided somewhat earlier;

(4)

in our view, this essential ‘passivity’ in disclosure is not ‘high’ quality disclosure in the context of a company that knew that there was fraudulent VAT evasion in some of its supply chains, and whose VAT return inaccuracies were deliberate.

We conclude that the ‘so-so’ quality of CFB’s disclosure of the inaccuracies is well reflected in the penalty percentages; the penalty percentage in respect of the Kittel inaccuracies is exactly midway the permitted range for penalties of this nature; the penalty percentage in respect of the zero rating inaccuracies was slightly more generous; HMRC did not argue that the latter should be changed and, in the circumstances, we are satisfied that it, too, reflects the quality of CFB’s disclosure, as slightly adjusted for the circumstances of the disclosure as regards the zero rating inaccuracies.

As we only have jurisdiction in this matter if HMRC’s decision in respect of the application of paragraph 11 was flawed, we first make findings of fact about HMRC’s decision making, as follows:

(1)

HMRC’s “penalty intention letter” of 16 February 2018 stated that HMRC did not consider there to be any special circumstances which would lead them to further reduce the penalties;

(2)

EY made representations on “special circumstances” in a letter of 12 June 2018. It argued that the following were special circumstances:

(a)

the amount of the penalty, being higher than the percentage in an HMRC consultation document of 28 September 2016

(b)

there had been no other FTT cases involving Schedule 24 and an MTIC case

(c)

the knowledge principle in Kittel is different to the test for a “deliberate” penalty

(d)

the penalty was raised only after the FTT decision on the underlying assessment

(e)

Schedule 24 has a compliance intention; it is to encourage taxpayers to avoid inaccuracies in tax returns; penalties should only have been assessed on the first of the inaccuracies;

(3)

HMRC’s letter of 13 September 2018 “reconsidering” the penalties, referred in some detail to the representations made by EY in the 12 June 2018, including as to special circumstances. It said that “independent review” (by another office of HMRC) would begin on issue of that letter. It also said that if this review upheld the penalties, “then the team with final responsibility across HMRC for special reduction will give the matter further consideration”;

(4)

HMRC’s “review conclusion letter” of 4 October 2018 also referred to EY’s 12 June 2018 letter and the points raised by it, including the points raised as to special circumstances;

(5)

at the hearing, HMRC Officer Lewis said in cross examination that the HMRC specialist team on “special reductions” had not, in fact, reviewed the matter following the upholding of the penalties by the reviewing officer; counsel for HMRC at the hearing said this was a “new” point and asked the Tribunal for permission to submit evidence, post-hearing, to show that such a review had taken place; we gave permission for this; however, the materials submitted by HMRC after the hearing – internal emails from July 2018 – did not indicate that “the team with final responsibility across HMRC for special reduction” had in fact reconsidered the matter following a decision by the reviewing officer;

(6)

we conclude, on the balance of probabilities, that, contrary to the indication in HMRC’s “reconsideration” letter of 13 September 2018, there was no further consideration of the matter by the “final responsibility” team at HMRC dealing with “special reductions”, following the reviewing officer’s decision to uphold the penalties.

The question before us is whether HMRC’s decision in respect of the application of paragraph 11 was flawed; in our view, the reference here to “HMRC’s decision” is to their decision as upheld after statutory review, per s83F Value Added Tax Act 1994 i.e. it is not a reference to HMRC’s letter of 4 May 2018 (assessing the penalties), in isolation. We base that view on s83G Value Added Tax Act 1994, which ties the bringing of an appeal to the statutory review process; it is also in keeping with the thinking (in respect of similar statutory language) in Atom Supplies Ltd (t/a Masters of Malt) v HMRC (Judge Jonathan Richards and Mr Robinson) [2015] UKFTT 0388 (TC) at [51-52], with which we respectfully agree.

In our view, HMRC’s decision in respect of paragraph 11, as so understood, was not flawed (when considered in the light of principles applicable in judicial review proceedings): it took into account all material matters; it did not take into account immaterial ones; it was not irrational or perverse, on the evidence before HMRC. The fact that HMRC, in their reconsideration letter of 13 September 2018, indicated that there was going to be further consideration of the matter by a “final responsibility” team at HMRC dealing with special reductions, if the reviewing officer upheld the penalties, and this did not in fact happen, does not render HMRC’s decision unfair or unlawful, as

(1)

the review decision letter, in the event, dealt with the “special circumstances” issue adequately; it took EY’s representations into account (and adequately understood them); it did not make any material error of law in its consideration of the issues; it did not reach a perverse or irrational conclusion; there was, in effect, no unfairness or injustice to CFB as a result of the “further consideration” by the HMRC “final responsibility” team not having occurred; and

(2)

it seems to us, on the evidence before us, inevitable that, even if the HMRC “final responsibility” team had reconsidered the matter, the decision would not have been different.

It follows that we have no jurisdiction to rely on paragraph 11 to any different extent than HMRC did.

In case we are wrong in the foregoing analysis of jurisdiction, we will go on to consider paragraph 11 ourselves; however, because the relevant issues overlap, we will do so after we have considered whether the penalties are disproportionate.

Our starting point is that the scheme of Schedule 24, as described at [56-58] above, is a proportionate one: indeed, at the hearing, CFB accepted this.

Many of CFB’s arguments as to why Schedule 24, despite being a proportionate regime, creates a disproportionate outcome in this case, go to the nature of the law that gives rise to the lion’s share of the “PLR” in this case, namely, the Kittel principle, disallowing input tax incurred in transactions where (as here) the recipient of the supply knew of the connection to fraudulent VAT evasion. CFB, in effect, argues that it is disproportionate to apply Schedule 24’s (otherwise proportionate) penalty percentages to Kittel-based “PLR” because Kittel

(1)

does not require the taxpayer in question to have been, itself, fraudulent; and

(2)

does not stop HMRC from disallowing input tax, in respect of every supply in a chain of supplies connected to fraudulent VAT evasion (and even where output tax on the supply in question has been accounted for); so HMRC may have been “recompensed” (or more than recompensed) for any output tax not accounted for (due to fraud) in that chain of supplies.

In our view this is a flawed argument:

(1)

Kittel-based disallowance of input tax is well-settled law; the aspects of it which CFB highlights, immediately above, are commonplace and inherent to it; as Moses LJ explained in Mobilx v HMRC [2010] EWCA Civ 517 at [41], Kittel

enlarged the category of participants [in fraudulent VAT evasion] to those who themselves had no intention of committing fraud but who by virtue of the fact that they knew or should have known that the transaction was connected with fraud, were to be treated as participants. Once such traders were treated as participants their transactions did not meet the objective criteria determining the scope of the right to deduct.

(2)

The emphasised (by us) wording in the above indicates both the breadth of the Kittel principle and its being core to the allowability of input tax.

(3)

It seems to us that inaccuracy in VAT returns in the form of Kittel-based disallowance not being made, is as much to be discouraged (and so penalised) as other sorts of inaccuracy in tax returns. It is not therefore disproportionate to apply a proportionate regime, like Schedule 24, to Kittel-based disallowance of input tax, as to any other sort of “PLR”.

Moreover, the arguments above, based on features inherent to the Kittel principle, are not distinctive to CFB or its circumstances; on the contrary, the application of Kittel in CFB’s case is an ordinary application of the principle to just the sort of set of facts it was designed to apply to i.e. one where the taxpayer was not fraudulently evading VAT, but had knowledge of the connection to fraudulent VAT evasion by someone else in the supply chain. CFB’s arguments above are therefore more a complaint about the Kittel principle in general, than an argument that the application of Kittel to CFB’s circumstances in particular is disproportionate.

Nor, in our view, are the penalties here rendered disproportionate because the “PLR” in this case was the amount HMRC would have had to pay CFB, if the inaccuracies had not been corrected: it is proportionate, in our view, in a regime designed to encourage and ensure compliance with the law, to levy the penalty on the outcome that would have ensued from the inaccuracy contained the VAT return, even if, in the event, and due to HMRC’s investigations and caution, that (incorrect) outcome did not ensue.

As to the European case law cited by CFB:

(1)

In Farkas, the parties to a transaction operated the “ordinary” VAT system, whereas they should have been operating the “reverse charge” system; this meant that the tax authorities were paid the right amount of VAT by the seller – but they should have received this from the buyer under the “reverse charge”; a penalty of 50% of the VAT involved was imposed on the buyer. For the CJEU, this was an “infringement of an administrative nature”; there was no loss of revenue for the tax authorities; and no evidence of fraud.

In our view, CFB’s case is quite different: Kittel-based disallowance of input tax is far from being an “infringement of an administrative nature”, as shown by the quotation from Mobilx and discussion above.

(2)

EN.SA concerned fictitious circular sales of electricity at the same prices between companies in the same group (for reasons unconnected with VAT or tax). The CJEU first held that input tax on these transactions could be disallowed, even though output tax on the same transaction remained payable – provided that the output tax liability could be adjusted when issuer of the invoice had “wholly eliminated the risk of any loss of tax revenue”. The CJEU then went on to find that a fine imposed on the disallowed input tax was disproportionate, due to the fact that no tax revenue had been lost (due to the output tax paid); and also due to the principle of neutrality, as it was envisaged that the output tax on the fictitious transaction would be “corrected” when the risk of any loss of tax revenue had been eliminated.

This is again quite different to CFB’s case: this was a very unusual set of circumstances, with “fictitious” transactions within a single corporate group, and where the risk of tax loss to the revenue could be eliminated; the Kittel principle, in contrast, involves non-fictitious transactions and chains of transactions connected with fraudulent VAT evasion.

We also do not accept CFB’s arguments based on s69C: the facts that

(1)

Parliament enacted a different (and alternative) penalty with a 30% fixed rate; and

(2)

HMRC stated in a prior consultation document that, in their view, this fixed rate was proportionate

For reasons very similar to those in the preceding section about proportionality, we would not have found there to be special circumstances making it right to reduce the penalties, even if we had jurisdiction in the matter: as we say at [72] above, the penalties are based on what seem to us an ordinary application of the Kittel principle to just the sort of facts it was designed to apply to; nor, as we say at [73], is there anything “special” about the PLR in this case being the amounts HMRC would have had to pay to CFB, had the Kittel inaccuracies not been corrected; and, consonant with what we say at [75] above, the enactment of s69C, being a different (and alternative) penalty regime, did not create “special circumstances” for the purposes of these penalties under Schedule 24. The negative financial effects on CFB of paying the penalties were asserted in general terms (see [47] above) but not expanded upon or proved in evidence; on the information before us, they do not comprise special circumstances making it right to reduce the penalties.

It follows from the foregoing that the appeal falls to be dismissed: HMRC’s decisions to raise the penalties are affirmed.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.