Joanne Lunn and Vanilla Monsoon Ltd v The Commissioners for HMRC

HMRC say that for each of these periods VML’s sought to deduct under the heading “cost of goods sold” purported payments to Ms Lunn which were in essence artificial sums intended to reduce its taxable profit.

HMRC’s position here reflects its view of Ms Lunn’s purported trade for those periods.

In essence HMRC say that the amounts that CLAC sought to treat as payments by VML to Ms Lunn for the use of her assets were artificial amounts which were not properly incurred by VML or charged by Ms Lunn and which were instead simply a mechanism for allocating sums between VML and Ms Lunn.

VML and Ms Lunn contend that this is not the case and that the amounts were genuinely charged by Ms Lunn and incurred by VML.

Again the technical position is not in dispute.

For the accounting periods in question s. 74(1) ICTA 1988 provided:

For a deduction in a company’s accounts to be an allowable deduction for tax purposes for those periods, it must have been incurred and if incurred it must have been incurred wholly and exclusively for the purposes of the company’s trade.

We look at each of the years in question.

VML’s accounts for the year ended 31 March 2008 show, under the heading “cost of sales” an amount of £6750 described as “Direct Costs”.

From examination of Ms Lunn’s sole trade accounts for the year ended 31 March 2008 and from various manuscript annotations to Ms Lunn’s sole trade accounting papers (and a schedule of outgoings) for that period, HMRC say that £750 of the Direct Costs relate to expenditure on a course attended by Ms Lunn. The £6,000 is shown in the manuscript annotations simply as “+6000 to S/T” and “I ex Ltd 6000”.

HMRC say that the £6,000 did not represent allowable direct costs of VML and was simply a shifting of amounts between VML and Ms Lunn’s sole trade, noting that it is equal to the entire turnover of the purported sole trade for the same period. They contend that it was simply an artificial mechanism employed to decrease the taxable profit in VML.

HMRC further contend that either the amounts were not actually paid, representing “paper allocations” between VML and Ms Lunn or if incurred they were not incurred for the purposes of VML’s business. In either case they say that the amounts are not allowable expenses in computing VML’s taxable profit.

Ms Lunn could not fully explain the basis on which the £6000 of expenditure had been allocated to VML. As we have outlined in our discussion above on whether Ms Lunn was carrying on a trade, she described the payment as being made for use of her personal IP. She could not, however, provide any information in respect of the method of allocation or an analysis of what the payments were for. She said that she did not make those decisions – they were made by Mr Lunn.

Ms Lunn was also asked about the £750 and it became apparent on questioning that this related to a training course on astrology which Ms Lunn and her team attended in connection with her employment with UCCP. This was because it was the only cost of £750 that could be identified and also because the manuscript annotations referred to a “course”. Ms Lunn could not explain why the cost was being claimed as a cost of sales for VML. When asked whether she had raised this with her father she said that she could not remember.

Mr Lunn said that the £6,000 represented charges for “the use Ms Lunn’s assets”.

He went on to say that Ms Lunn’s sole trade was a “cipher or charging” vehicle as “recommended by HMRC”. He added that this arrangement was one which had been regularly condoned and approved of by HMRC

He said that as he saw it Ms Lunn had two options. The first was to sell her assets to VML, the second was to retain them and the ability to use them and to carry on as a sole trader – this involved charging VML for their use. She had taken the second option.

He explained that the payments were for her “skill, assets and experience”. He was however unable to definitively list what the assets were.

He also acknowledged that there was no formula in place for determining the usage charge nor was there any licence agreement.

Mr Lunn could not explain a rational basis on which the amounts were computed. When questioned he said that the amounts were varied and depended, in each year, on “where we wanted profit”. He went on to say that in making that determination he looked at the overall position including the expenses incurred by Ms Lunn and their recharging and also taking into account utilisation of Ms Lunn’s personal allowance.

Mr Lunn also stressed that the apportioned amounts were based on the “use of the assets” which was distinct from the “value” of the relevant assets. The asset value was therefore irrelevant.

When asked about the claim for £750 for the course he said that the claim may not have been for the course. He could not however say what it was for.

We find that £6,000 of the “cost of sales” was, on the balance of probabilities, an arbitrary apportionment of amounts between VML and Ms Lunn’s sole trade. In effect it was as HMRC put it, a “paper exercise of moving sums between the accounts”

We could not identify a supportable basis on which the payment was made and find that it was either not incurred or if incurred it was clearly not incurred wholly and exclusively for the purposes of VML’s trade.

Ms Lunn could not explain the basis for the allocation and Mr Lunn’s explanation confirmed that there was no commercial basis for the allocation.

As we have explained in our discussion in relation to Ms Lunn’s purported sole trade, we find that the arrangements between VML and Ms Lunn’s sole trade did not reflect any commercial reality.

We have again taken into account in our assessment the CLAC Cases which show that CLAC has in other situations previously apportioned expenditure between entities on an entirely artificial basis.

Notably, in Kingdon Mr Lunn sought to allocate artificially the revenues of what was found to be a single business between two businesses (a partnership and a company). The Tribunal concluding that:

Although the facts of this case are distinct from those in Kingdon, we believe that Kingdon is helpful as it is an example of Mr Lunn being found to have demonstrated a complete disregard for the commercial reality of a situation and his willingness to present knowingly to HMRC an artificial allocation of expenditure between two entities.

We noted Mr Lunn’s numerous comments as to the validity of partnerships/sole traders and companies being run “alongside each other”. This was a key point for him. He also stated that his wife operated a similar system to Ms Lunn and HMRC had not made any adjustments to her position, a point reinforced by Ms Lunn.

We are not however determining whether as a general principle an individual can charge their personal service company for the use of assets and recovery of expenses. We are looking here at whether particular expenditure has in fact been incurred by VML.

On the £750 – we find that this was likely to be the same sum claimed for the astrology course by Ms Lunn in her self-employment accounts – and further that it related to her employment with UCCL Ltd.. Ms Lunn and Mr Lunn both said that it was not necessarily the same amount – but it is a specific figure 750 and the expense was labelled specifically as “course” – on the balance of probabilities it is therefore likely to be the same expense.

We find accordingly that there was a loss of tax for the two accounting periods.

The position for the period ending 31 March 2009 is very similar to the previous period and HMRC’s submission is the same.

The amount described in the accounts as the cost of goods sold is £18,836 of which £12,786 represented the turnover of Ms Lunn’s purported sole trade for the same period.

Here HMRC point to the following:

Ms Lunn had no further information for this period.

Mr Lunn noted that VML did not actually produce a trial balance – as “double entry book keeping” was never used by it. He saw HMRC’s reference to a trial balance as an example of its lack of integrity.

As with the costs of direct sales for the period ended 31 March 2008 we find that the direct costs of £12,876 were, on the balance of probabilities, either not incurred at all or if incurred were not incurred wholly and exclusively for the purposes of VML’s trade.

This is for the same reasons given in relation to the earlier period. In short they were arbitrary allocations of amounts between VML and Ms Lunn.

Accordingly, we find that there was a loss of tax for the period as the expenditure was not allowable.

After being dormant for several years and submitting tax returns showing no turnover or profit for the periods ending 31 March 2011 - 2015, VML produced trading accounts for the period ending 31 March 2016 and 17.

VML’s accounts for this period showed, under the heading, “cost of raw materials and consumables” an amount of £11,634. This is the same amount shown in Ms Lunn’s self-employment page of her income tax return for 2015/16 as her turnover.

VML’s accounts for this period showed under the heading “cost of materials” an amount of £19,711.

Ms Lunn’s self-employment page of her income tax return for 2016/2017 showed turnover of £11,717.

It is not disputed that the entire £11,634 “cost of raw materials and consumables” shown in the 2016 accounts and £11,717 of the “cost of materials” shown in the 2017 accounts were treated by Ms Lunn as the turnover of her sole trade in her tax returns for the corresponding tax years.

HMRC submit that, as for the accounting periods ending 31 March 2008 and 2009 the sums were not actually incurred by VML or if incurred they were not incurred wholly and exclusively for the purposes of VML’s trade and in either case represented paper transactions with no commercial reality undertaken for the purpose of reducing taxable profit.

HMRC have not been able to provide the documentary supporting evidence that they were able to provide in respect of the previous years. This is because the papers obtained from the raid on CLAC’s premises cover only periods up to 31 March 2009.

They rely here on the similarity between the facts for 2016 and 2017 and the facts of the pre-dormancy years – in particular the fact that the costs claimed by VML in those years was equal to the turnover of Ms Lunn’s purported sole trade - and say that a presumption of continuity should apply.

The applicable legislation is materially the same as for the earlier accounting periods, although section 74 ICTA 1988 was replaced with section 54(1) of the Corporation Tax Act 2009 (“CTA 2009”) which provides:

The arrangements appear to be the same as those adopted by VML and Ms Lunn for the periods ending 31 March 2008 and 2009.

It is also clear to us that the allocation of income to the “sole trade” by VML and Ms Lunn was based on a very firmly held belief of appropriateness by Mr Lunn, and neither Ms Lunn nor Mr Lunn indicated that this principle had changed in any way for 2016 or 2017.

Additionally Ms Lunn did not refute in her correspondence with HMRC its contention that the same methodology had been adopted after the period of hiatus, and she continued to maintain that the turnover of her sole trade consisted of the reimbursement of expenses, charges for use of assets or both.

We consider therefore that on the balance of probabilities the expenditure was, as for the previous years, an artificial transfer of income between VML and Ms Lunn.

On this basis we find that these amounts were not expenditure incurred by VML but were artificial amounts designed to reduce profit as per the earlier periods and that they were either not incurred by VML or if incurred were not incurred wholly and exclusively for the purposes of VML’s trade.

We find accordingly that there was a loss of tax for these periods as VML was not entitled to deduct for corporation tax purposes the amounts shown in its accounts for these charges.

Having considered Ms Lunn’s and VML’s tax position for each of the relevant years we turn now to consider the validity of the discovery assessments.

The relevant legislation for individuals and corporates is in all material respects as regards these appeals the same, although it is contained in different statutes.

For individuals the relevant provisions are in TMA 1970 and for companies they are in schedule 18, FA 1998.

In this judgment we set out in full, for convenience and to avoid duplication, the provisions for individuals and we refer to the corresponding statutory references for companies.

We deal first with Ms Lunn’s assessments and VML’s assessments for its accounting periods ending 31 March 2008 and 2009 as these were made more than four years after the end of the years of assessment to which they relate.

S. 29(1) TMA 1970 (para. 41, sched.18 FA 1998) provides, so far as relevant, that

S. 29(2) TMA 1970 (para. 45, sched. 18 FA 1998) provides that a taxpayer may not be assessed where the loss is attributable to an error or mistake made in accordance with generally prevailing practice at the time it was made.

S. 29(3) TMA 1970 (para. 42, sched. 18 FA 1998) provides that an assessment may not be made unless one of two conditions set out at ss. 29(4) and 29(5) is fulfilled.

S. 29(4) TMA 1970 (para. 43, sched. 18 FA 1998) is fulfilled where:

For there to be a discovery, two tests must be met by an HMRC officer. The first is subjective and the second objective. The tests were helpfully set out by the Upper Tribunal in Anderson v HMRC [2018] 4 All ER 338.

The subjective test is that:

The objective test is satisfied if:

The Upper Tribunal added:

As we have outlined earlier, Officer Baker explained that he became aware of the likely loss of tax when he reviewed the records identified by his predecessor Officer Elvin from the materials obtained in June 2010 following HMRC’s seizure of documents from CLAC.

He explained how in forming his view he had taken into account the manuscript amendments made to Ms Lunn’s accounting records by Mr Lunn, the lack of any supporting evidence in respect of the amounts claimed and the lack of any evidence as to Ms Lunn’s purported trade. He also said that he agreed with the conclusions reached by Officer Elvin.

Ms Lunn contends that HMRC were only able to make such a determination as they had approached the case with a less than open minded view. She claims that HMRC’s view was prejudiced because of Mr Lunn and CLAC’s involvement.

We do not agree with Ms Lunn. It is of course the case that HMRC’s suspicion arose as a result of its investigations into CLAC. This is clear from the letters sent to Ms Lunn and to other CLAC clients. It would also be difficult to conclude that the context in which the papers were obtained, and Mr Lunn and CLAC’s history were not factors in the determination reached. However, it does not follow that it was a prejudiced view which led to Officer Baker’s determination. Officer Baker was able to point to specific facts which underpinned his conclusions on Ms Lunn’s position for each of the relevant years and those facts appear to us to be reasonable.

We find accordingly that Officer Baker’s view was reasonable and objective.

We have concluded that there was a loss of tax in 2005/06 as Ms Lunn’s expenses were, on the balance of probabilities, overstated. We have also concluded that there were losses of tax in the 2006/07 and 2007/08 tax years as Ms Lunn was not carrying on a trade and so could not have generated trading losses for offset against her general income.

Having made those findings, it is then necessary to consider whether the loss of tax was brought about carelessly or deliberately by Ms Lunn or someone acting on her behalf.

HMRC say that the losses were deliberately brought about by CLAC as a person acting on behalf of Ms Lunn.

HMRC cited the Upper Tribunal decision in John Hicks v HMRC [2020] UKUT 0012 (TCC) in which the UT agreed at [122] that the test for whether a person acts on another’s behalf for the purpose of s 29 TMA 1970 is the test set out in Bessie Taube Trust v Revenue & Customs [2010] UKFTT 473 TC which is as follows;

It is clear to us that CLAC as authorised tax agent of Ms Lunn was a person acting on behalf of Ms Lunn whilst that engagement lasted.

It is then necessary to consider whether CLAC’s behaviour was deliberate.

S. 118(7) TMA 1970 provides that:

The meaning of the phrase “deliberate inaccuracy” was considered by the Supreme Court in Tooth which summarised its conclusion as follows;

For the 2005/06 tax year we have found that, on the balance of probabilities, Mr Lunn chose to inflate the amounts initially specified in Ms Lunn’s accounting papers. Those amounts were intended to be and were actually taken into account as deductible expenditure in Ms Lunn’s tax return which was prepared by CLAC. We find that this behaviour was clearly deliberate.

For 2006/07 and 2007/08 we have found, again on the balance of probabilities, that Ms Lunn was not carrying on a trade. We also found that the purported trade was a mechanism devised and implemented by Mr Lunn to transfer amounts between VML and Ms Lunn in order to reduce taxes payable without regard to the reality of the arrangements between them.

Mr Lunn has maintained consistently that this represented a legitimate allocation of amounts between two trading entities and was an entirely valid business structure adopted by many other taxpayers.

The Appellants’ joint skeleton argument also states that there was a “clear and logical reason and explanation why the acts that the respondent complains of were carried out”. On this basis they contend that there was no “careless or deliberate behaviour” intended to cause a loss of tax for the purpose of the discovery provisions. There was instead, they say, a genuine belief as to the appropriateness of the accounting treatment and the tax returns. A genuine belief as to correctness would, even if subsequently found to be incorrectly held, would not amount to careless or deliberate behaviour.

As we have already mentioned we are not assessing whether or not it is possible for two entities to ever apportion amounts between themselves, with one making payments for the use of assets belonging to another. We are instead looking at the specific arrangements between Ms Lunn and VML and determining on the evidence available what was actually in place.

Here we found that there was no trade being carried on by Ms Lunn for the periods in question and neither Ms Lunn nor VML were able to provide any support for the payments purportedly made by VML for use of Ms Lunn’s assets. This is not therefore a case of considering the legitimacy of a commercial arrangement, it is instead a case of what we consider to be an artificial and unsupportable allocation of sums between two entities. We find this to clearly be deliberate behaviour on the part of CLAC.

We note also that this was not a mistake which for the purpose of s. 29(2) TMA 1970 could be regarded as being in accordance with generally prevailing practice at the relevant time.

The normal time limit for assessing a company is four years from the end of the accounting period to which the assessment relates (s. 34(1) TMA 1970).

That time limit is extended to twenty years in circumstances where the loss of tax has been brought about deliberately by a person (or a person acting on their behalf) (s. 36(1A) and (1B) TMA 1970).

As we have found, CLAC was a person acting on behalf of Ms Lunn and the loss of tax was brought about deliberately. The twenty year period therefore applies and the discovery assessments were made within that period.

We find therefore that the discovery income tax assessments for tax years 2005/06, 2006/07 and 2007/08 were validly issued.

Our findings in relation to VML correspond generally to our findings in relation to Ms Lunn.

Specifically, we find that there was a discovery, for the purpose of para. 41, sched. 18 FA 98, by Officer Baker of income that should have been assessed to tax but which had not been.

We also find that CLAC was a person acting on VML’s behalf within the meaning of para. 43, sched. 18 FA 98 and that CLAC/Mr Lunn’s behaviour was, for the purpose of that paragraph, “deliberate” and therefore the requirements of para. 42, sched. 18 are fulfilled.

As noted above, the normal time limit for assessing a company is four years from the end of the accounting period to which the assessment relates (para. 46, sched.18, FA 98).

That time limit is extended to twenty years in circumstances where the loss of tax has been brought about deliberately by a person or a person acting on their behalf (para. 46(2A)(b) and (2B), sched. 18 FA 98.

As we have found, CLAC was a person acting on behalf of VML and the loss of tax was brough about deliberately. The twenty year period therefore applies and the discovery assessments were made within that period.

We find accordingly that the discovery assessments for the periods ending 31 March 2008 and 2009 were validly issued.

For completeness we note para. 45, sched. 18 FA 1998 which prevents a taxpayer from being assessed where the loss is attributable to an error or mistake made in accordance with generally prevailing practice at the time it was made. As we concluded in relation to Ms Lunn we also find that VML’s purported losses for the relevant years did not arise from an error or mistake made in accordance with then prevailing accounting practice.

For these accounting periods HMRC do not rely on CLAC/Mr Lunn’s deliberate behaviour in order to support the discovery assessment. They rely instead on para. 44, sched. 18 FA 98 which provides as follows:

HMRC contend that for these periods there was nothing in the tax returns or information provided by VML or Ms Lunn to indicate or draw attention to there being any loss of tax and so they could not have been reasonably expected to be aware of the loss of the tax.

Mr Bracegirdle cited the decision of Auld LJ in Veltema v Langham [2004] All ER 436 to help show the nature of information which could make an HMRC officer “reasonably aware” of an insufficiency of tax. In that case Auld LJ concluded:

HMRC have submitted that the loss of tax for these periods became apparent only after the seized CLAC papers relating to VML and Miss Lunn were reviewed and their content compared with their earlier tax returns. This was when Officer Elvin had been able to review the papers which was some time after the seizure. We heard from Officer Baker that he had reviewed Officer Elvin’s findings and agreed with them and how following correspondence with VML and Miss Lunn he issued the assessments in May 2019.

We also heard from him how prior to the review of the CLAC papers HMRC did not have sufficient information to be aware of VML’s underpayments of tax and on this basis were justified in making the assessments.

We agree with HMRC, taking into account the decision in Veltema,that insufficient information was available until review of the CLAC papers for HMRC to be aware of the loss of tax.

As the normal time limit for assessing a company under a discovery assessment is four years from the end of the accounting period to which it relates and the assessments were both issued in May 2019 they are within that limit.

Accordingly we find that the discovery corporation tax assessments for 31 March 2016 and 2017 were validly issued.

We turn next to consider the penalties imposed

There is no dispute as to the technical provisions.

For individuals, s. 95 TMA 1970 provided that where a person fraudulently or negligently delivered an incorrect return for that person to be liable to a penalty not exceeding the additional tax payable.

For companies, the equivalent provision was contained in para. 20, sched. 18 FA 1998

S. 100 TMA 1970 provided for both individuals and companies for the penalty to be set at an amount which in the opinion of an authorised officer of the board is correct or appropriate.

HMRC submit that Ms Lunn’s tax returns for 2005/06, 2006/07 and 2007/08 were negligently delivered.

Here it is Ms Lunn’s behaviour rather than that of CLAC/Mr Lunn which is relevant.

The term “negligent” is not defined for the purpose of the penalty provisions but has been considered by the courts a number of times. Mr Bracegirdle referred us to the Upper Tribunal’s decision in Colin Moore v HMRC [2011] UKUT 239 (TCC). Here Judge Bishopp when considering the term in the context of a discovery assessment agreed with the proposition that a two stage approach was necessary. He described the stages as follows:

He saw the first as a question of law and the second as a question of fact. He went on to say that:

HMRC submit that although CLAC/Mr Lunn was Ms Lunn’s agent, she still had responsibility for checking and signing her tax returns. They point out that the two key inaccuracies – the inflation of expenses and the charging of amounts to VML by Ms Lunn on the basis of Ms Lunn’s purported trade - were so obviously incorrect that no tax expertise was needed in order to be aware of that incorrectness. HMRC submit that in effect Ms Lunn “collaborated in a fiction” and took no steps to ensure the accuracy of her tax returns.

Ms Lunn contends that she was not negligent, arguing that there was nothing wrong with her tax affairs. Much of her argument relates to her belief in the accuracy of her returns, Mr Lunn’s methodology and her view that HMRC were treating her unfairly on the basis of CLAC/Mr Lunn’s involvement in the returns.

Having considered the evidence and the submissions, we find that Ms Lunn was negligent. In relation to the inflated expenses we agree with HMRC that Ms Lunn could reasonably be expected to have known what her actual expenses were. We also agree with HMRC that no tax expertise would have been necessary to know that the preparation of her return on the basis of her charging VML for the use of her personal IP was not based on commercial reality.

S. 100(1) TMA 1970 provides for penalties to be set at an amount which in the opinion of an authorised officer of the board is correct or appropriate.

HMRC have explained how they allowed as deductible expenses the amounts originally stated in Ms Lunn’s papers as expenses for travel and subsistence and book and journals for the 2005/06 tax year, disallowing only the additions to those amounts corresponding to Mr Lunn’s manuscript notes. They also explained how for the 2006/07 and 2207/08 tax years they treated Ms Lunn and VML as carrying on a single trade, allowing VML the total expenditure shown in both sets of accounts but disregarding the arrangements between Ms Lunn and VML. This was intended to ensure that the single business was not denied relief for expenditure actually incurred and was consistent with the position that a single trade existed.

On the basis of these approaches the assessments and penalties for the relevant years were as follows

Officer Baker explained in his witness statement how he had reduced the quantum of the penalties to take into account Ms Lunn’s co-operation and the fact that the amounts at stake were relatively small. The result of the abatements was a 65% reduction in the size of the penalty.

We consider the penalties to be reasonable and uphold the amounts assessed for each of the years.

For accounting periods ending 31 March 2008 the rules for companies were equivalent to those for individuals (para. 20, sched. 18 FA 1998).

As with Ms Lunn, it is necessary to consider VML’s behaviour rather than that of CLAC/Mr Lunn in relation to its tax return for that period to see whether it was negligent.

Adopting the two stage approach set out in Colin Moore, VML had an obligation to take care that its tax return was accurate. We have found that the return was not accurate as it did not reflect the commercial reality of the arrangements between VML and Ms Lunn. As we have found in relation to the sole trade, the inaccuracy of the return and the fact that it did not reflect the commercial position is something that Ms Lunn as director of VML should have been aware of. No tax knowledge would have been necessary for such a determination.

We therefore find VML to have been negligent.

As outlined above, the approach taken by HMRC was to disregard the arrangements between Ms Lunn and VML and to treat VML as if a single trade was carried on.

The result of this approach for VML for this period was a tax assessment of £406.20 and a penalty of £142.

In determining the penalty amount, Officer Baker reduced the quantum of the penalties to take into account Ms Lunn’s limited co-operation and the fact that the amounts at stake were relatively small. As with the penalties for Ms Lunn the result of the abatements was a 65% reduction in the size of the penalty.

We consider the penalty reasonable and uphold the amount assessed.

For these periods para. 1, sched. 24 FA 2007 provides that a penalty is payable where, so far as relevant, a person gives HMRC a company tax return which contains an inaccuracy that amounts to or leads to an understatement of a liability to tax or a false or inflated statement of a loss and that inaccuracy was “careless”.

HMRC contends that for the relevant periods VML was “careless” for this purpose.

Para. 3, sched. 24 FA 2007 provides that an inaccuracy is careless for this purpose if it is “due to failure by P to take reasonable care”.

Mr Bracegirdle cited Judge Berner’s summary in David Collis v HMRC [2011] UKFTT 588 (TC)of the standard of behaviour against which carelessness is to be judged for this purpose:

HMRC submits, consistently with its submission in respect of Ms Lunn’s returns and VML’s return for the accounting period ending 31 March 2008, that the inaccuracy in VML’s returns for these periods was attributable to Ms Lunn’s carelessness in her capacity as its director.

As with VML’s 2008 tax return, HMRC pointed out that VML’s tax returns and accounts did not reflect commercial reality and that this should have been apparent to Ms Lunn or any reasonable taxpayer in her position. They say that continuing to submit returns which showed that VML was trading with herself was neither reasonable nor prudent.

We agree with HMRC and find that VML was careless for the purpose of the penalty provisions.

As we have outlined above, HMRC recomputed VML’s tax position for the relevant years on the basis that a single trade was being carried on, effectively disregarding the arrangements between it and Ms Lunn.

On the basis of that approach the assessments and penalties for the relevant years were as follows:

Para. 4, sched. 24 FA 2007 provides that for careless inaccuracy the penalty is 30% of the potential lost revenue.

Paras. 9 and 10, sched. 24 FA 2007 provide for a reduction in penalties where a person discloses the inaccuracy, the percentage reduction depending on whether the disclosure is standard, prompted or unprompted.

Para.11, sched. 24 FA 2007 allows HMRC to reduce the penalty chargeable if there are “special circumstances”.

Officer Baker outlined in his witness evidence how he had reduced the penalty by a small amount to reflect Ms Lunn’s limited disclosure and that he saw no special circumstances justifying any further reduction in the penalties.

We consider the penalties reasonable in the circumstances and uphold the amounts as assessed by HMRC.

For the reasons given we find that the discovery assessments against Ms Lunn for the tax years 2005/06, 2006/07 and 2007/08, and the assessments against VML for accounting periods ending 31 March 2008, 2009, 2016 and 2017 were validly issued.

We are also satisfied that the quantum of those assessments is reasonable and the appellants have not satisfied us that, on the balance of probabilities, those assessments are incorrect.

We find that the penalties levied on Ms Lunn for tax years 2005/06, 2006/07 and 2007/08 and the penalties levied on VML for accounting periods ending 31 March 2008, 2009, 2016 and 2017 are valid and set at an appropriate level.

The appeals are therefore dismissed.

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.