Sprowston Food and Wine Limited v The Commissioners for HMRC

The Appellant is Sprowston Food and Wine Limited (‘Sprowston’). The Respondents are the Commissioners for His Majesty’s Revenue and Customs (‘HMRC’).

This is an appeal to the First-tier Tribunal (‘the Tribunal’) by Sprowston against HMRC’s decision to issue (a) revised VAT assessments in the sum of £23,032.00 through VAT periods 09/13 to 06/18, under section 73 (1) of the Value Added Tax Act 1994 (‘VATA’) and (b) penalties for deliberate behaviour in the sum of £14,514.56, under Schedule 24 (1) of the Finance Act 2007 (‘FA’). This was by way of personal liability notice on the sole director of Sprowston.

In this case the VAT assessments have been based upon HMRC’s corporation tax calculations. Those concluded that for the director of Sprowston to meet unaccounted expenditure and personal drawings there must have been an under declaration of VAT by reference to unaccounted for sales.

Before the hearing we received a 535-page bundle containing the relevant documentation. This included witness statements from Officer Harvey, a VAT Tax officer at HMRC, Officer Valladares, an officer in the Technical and Specialist Compliance Team and the director of Sprowston Mr Balasingham. We also received a 288-page bundle containing legislation and authorities. There were also skeleton arguments on both sides.

At the invitation of the Tribunal, HMRC went first. The Respondents opened and called Officers Valladares and Harvey. Mr Buttar, on behalf of Sprowston, then called Mr Balasingham. All witnesses were cross-examined.

We directed written closing submissions and were grateful to receive them from HMRC drafted by Mr Brown, and from Mr Buttar thereafter. Mr Buttar attached some documentation that was not before the Tribunal at the hearing. We did not invite HMRC to respond to this and we are prepared to admit the material de bene esse.

We thank both Mr Brown and Mr Buttar for the way they presented their respective cases orally and in writing.

We set out shortly here the rival cases. Given the interplay between the Corporation Tax position and VAT in this case it is of assistance to understand the positions taken by both parties at the outset.

HMRC submit:

Sprowston submit:

As we have said we heard from three witnesses. We accept that Officers Harvey and Valladares were honest witnesses who gave their evidence to us in a helpful way, making concessions as appropriate.

We found Mr Balasingham’s evidence limited. We accept he did not accept the case against him insofar as the turnover figures upon which the VAT assessments were based upon. We also accept he did not accept that his behaviour was deliberate insofar as the imposition of the penalty was concerned. However there was no detail beyond those assertions. Overall, we derive little assistance or evidence in his favour from what he said.

We make the following findings of fact based upon the evidence we heard, and the documents supplied to us. These findings are those that are necessary for our decision.

Mr Balasingham arrived from Germany where he had lived for 23 years in 2008 with his wife and three children. He learned English and sought to set up a business. He found an accountant and began his business. His (previous) accountant would give the answers to HMRC on his behalf and when he requested certain records back from HMRC they were not given.

Sprowston has one director namely Mr Balasingham. Sprowston registered for VAT effective 1 August 2013. The business activity was registered as a general store predominantly selling food, drink or tobacco products.

On 9 October 2018 Officer Valladares opened a compliance check into Sprowston’s corporation tax return for period end 30 June 2017.

After making investigations using bank statements, he discovered expenditure going through Sprowston which could not be accounted for by Mr Balasingham’s remuneration or any director’s loan account. Officer Valladares concluded for tax years 2014, 2015, 2016 and 2017 that sums had been used from Sprowston to pay Mr Balasingham’s mortgage, car lease and other personal expenditure. Mr Balasingham had also been using stock in a personal capacity. This was communicated to Sprowston by letter dated 10 April 2019.

On 28 May 2019 after receiving submissions from Sprowston’s then agents Officer Valladares made adjustments to the estimated turnover. On 26 June 2019 Sprowston’s then agent again wrote to Officer Valladares with further information. That included a report into Mr Balasingham’s health.

In evidence Officer Valladares told us the final figures for the additional sales he had arrived at which he shared with Officer Harvey for VAT compliance on 16 July 2019 were:

The drawings from the company were treated as director’s remuneration and allowable expenses. On that basis as the increase in turnover was directly matched by the allowable expense of remuneration (taxed to Income Tax and National Insurance Contributions) there was no increase in corporation tax which is solely based upon profits. Only the turnover aspect is relevant to VAT.

Officer Valladares took the offer of information from the previous accountant as a tacit acceptance that there was an inaccuracy in the turnover. If the figures were not agreed, then they were in his view at the time capable of being agreed.

There appears to be an outstanding appeal to the Tribunal about whether what Mr Balasingham received was wages or not. That appears to be confirmed by the material supplied to us after the hearing. Those figures have never been agreed by Sprowston or Mr Balasingham and, for the reasons given below (see paragraph [37]), not subject to any Tribunal decision.

Officer Harvey confirmed her first involvement as 16 July 2019 when Officer Valladares provided that information to her. On 25 July 2019 HMRC carried out a test purchase at Sprowston given concerns about the turnover. The test purchase officer recorded:

After further investigations on 18 September 2019 Officer Valladares shared the further information he had with Officer Harvey. A site visit, by a notice of inspection under paragraph 10 of Schedule 36 of the Finance Act 2008, took place which confirmed that the till at Sprowston was not recording VAT correctly.

We accept that Mr Balasingham had an accident in 2019 and entirely accept the medical record submitted by him at the hearing (which we do not set out), and for which we express out sympathy. However, it does not have a bearing upon the events up to 2018 nor whether the behaviour in relation to any inaccuracy was deliberate or not.

On 7 February 2020 HMRC’s data analysis reported on the till:

On 11 June 2020 Officer Harvey recorded that the wrong VAT codes were being used for certain sales, resulting in an underdeclaration of sales. After concluding that a number of standard rated items were being recorded as zero rated, on 21 July 2020 Officer Harvey decided that there had been a suppression of takings since Sprowston’s incorporation and that this was deliberate.

There was a pause for COVID. Thereafter throughout the rest of 2020 and into 2021 further discussions took place between Officer Harvey and Sprowston’s then agent as well as between Officer Harvey and Mr Balasingham. On 18 November 2020 they spoke. Although Mr Balasingham was in the shop serving at that point he was able to answer a number of Officer Harvey’s questions including telling her that all income was put through the till.

On 9 March 2021 Sprowston’s then agent wrote to Officer Harvey providing a number of documents that had been requested and indicating:

Officer Harvey told us:

On 21 March 2021 Sprowston’s then agent wrote to HMRC informing them they were no longer acting for Sprowston. That was received by HMRC on 4 August 2021.

On 29 April 2021 a ‘pre-decision’ letter was sent to Sprowston indicating that 85% of sales were standard rated. That figure was the accepted figure from Sprowston’s then agent.s From that VAT calculations were made for the tax years 2014, 2015, 2016, 2017 and 2018. That stated:

In the letter to Sprowston’s agent enclosed with the above, Officer Harvey stated:

The assessments under section 73 VATA were made to the best judgment of Officer Harvey. The correspondence also enclosed HMRC factsheet 9. That is headed Penalties for inaccuracies in returns and documents. On the second page it informs the taxpayer:

On 18 May 2021 Officer Valladares wrote:

On 21 May 2021 Officer Harvey held discussions with colleagues and concluded that because of the cash analysis, the lack of admission of inaccuracy and that there was sole responsibility the appropriate penalty was one that was based upon deliberate behaviour.

On 24 May 2021, that is before Officer Harvey’s deadline for disagreement, Mr Balasingham wrote disagreeing with the Officer Valladares’s original turnover figures. He said he was waiting for the final figures which had not arrived by the time he wrote to Officer Harvey (see letter dated 18 May 2021 above) before making an appeal.

On 9 June 2021 Sprowston de-registered for VAT.

On 23 June 2021 Officer Harvey gave notice of the VAT assessments under section 73 VATA in the total sum of £39,640.00. Sprowston was given the options of appealing to the Tribunal or seeking an independent review.

On 1 July 2021 Officer Harvey concluded that the deliberate penalties should be extended to include an officer’s personal liability. That was because she considered the risks with regards to this case, taking into consideration that Mr Balasingham had not engaged with the VAT check and had not advised HMRC of the change of ownership / sale of the business. Officer Harvey concluded due to the Corporation Tax review it was decided that there had been additional sales to cover expenses and savings accrued. Further that Mr Balasingham was responsible for ensuring information passed to his accountant was accurate, which he failed to do. Mr Balasingham also knew that the underdeclared turnover was being spent personally. Additionally, no reason for the discrepancy has been offered or substantiated and there was a risk that the Mr Balasingham would dissolve the company. There had already been a deregistration for VAT applied for on the basis that the company has ceased trading.

On 6 July 2021 Officer Harvey amended the VAT assessments by making a reduction to £38,192.00 as she was not pursuing the personal use aspect of the VAT assessment (although the corporation tax assessments where the VAT was allowed would not be adjusted). That was to Sprowston’s benefit.

On 11 July 2021 Officer Harvey wrote to Sprowston about the penalties HMRC intended to charge. Mr Balasingham had not been invited to make comments upon this before it was issued. That showed a non-suspended figure of £20,837.36. The letter explained the following:

After additional calculations the final penalty was assessed at 57.5% of the VAT assessment for tax periods 1/7/13 to 30/6/15 and 52.5% for tax periods 1/7/15 to 30/6/18.

On 13 August 2021 Officer Harvey issued a ‘personal liability notice’ under paragraph 19 (1) of Schedule 24 of the Finance Act 2007 for the penalties which would become due by him if Sprowston failed to pay them.

On 1 September 2021 Mr Balasingham sought an independent review against the personal liability imposition of the penalties by Officer Harvey.

On 7 September 2021 Sprowston sought an independent review of Mr Valladares corporation tax discovery assessments.

On 21 September 2021 Officer Harvey replied to Mr Balasingham informing that there was no right of appeal against a personal liability imposition, but that Sprowston could seek to appeal or require an independent review in writing with reasons as to why it disagreed with Officer Harvey.

On 27 September 2021 Mr Balasingham indicated he would be appealing against the closure notices shortly in relation to both VAT and Corporation Tax.

On 14 October 2021 Mr Buttar wrote to Officer Harvey with signed permission to represent Sprowston and Mr Balasingham. In November 2021 there was an exchange of correspondence.

On 19 December 2021 Mr Buttar wrote to Officer Valladares. He stated (in part):

On 17 January 2022 Officer Valladares issued HMRC’s view of the matter on the Corporation Tax position as the discovery assessments and closure notices for year-end 30 June 2015 and 30 June 2016 had been appealed.

On 20 January 2022 Officer Harvey replied to Mr Buttar’s letter of 19 January 2021 and issued HMRC’s view of the matter in relation to VAT. In it she stated (in part):

That was unfortunate. It does not constitute an unequivocal agreement to settle the VAT position. The last line makes clear there will be a review. In any event the Corporation Tax position was neutral as the increase turnover was matched by increased allowable expenses. The adjustments included those so although that reply suffered from a lack of clarity it was no more than that.

Officer Harvey further stated:

Further:

Both views of the matter provided the options to appeal or seek an independent review.

Sprowston elected a review.

On 15 March 2022 an officer of HMRC who had no prior involvement wrote to Sprowston acknowledging the request for the reviews.

On 22 March 2022 Mr Buttar wrote to Officer Harvey enquiring about how the conclusion about the deliberate nature of the inaccuracies was said to have been arrived at.

On 24 March 2022 Officer Valladares replied to Mr Buttar that as there was now an independent review, those findings were awaited.

On 8 June 2022 Mr Buttar wrote to HMRC about the cash position in relation to corporation tax of Sprowston.

On 1 July 2022 an officer who had no prior involvement wrote to Sprowston with the outcome of the independent review in relation to VAT. In it the VAT assessments were reduced from £38,192.00 to £26,584.24 and the deliberate penalties from £20,837.36 to £14,514.56. The best judgment of Officer Harvey was upheld in a staged analysis (see documents bundle page 419-431). The deliberate nature of the penalties was left in place.

In relation to special reduction the officer said:

At this point the officer accurately set out what was said about Mr Balasingham’s troubled history and health which might have impacted upon his behaviour. He continued:

On 4 July 2022 a different officer replied to Mr Buttar’s letter of 8 June 2022 regarding the turnover calculations for the discovery assessments in relation to Sprowston’s corporation tax. Mr Buttar succeeded in persuading HMRC to his position. In it the officer wrote:

However, that success, left Sprowston unable to appeal the Corporation Tax position as the Corporation Tax assessments are made upon profits not turnover. Sprowston and Mr Balasingham did not agree the increased turnover that was found by Officer Valladares; their argument here that the cash analysis was deficient was accepted.

We do not accept Mr Balasingham’s evidence that there was no increase in turnover as a result of this decision by HMRC. That is to misread what is said (as we emphasise in paragraph [65]) above.

On 1 February 2023 Mr Buttar received HMRC’s documentation showing the Corporation Tax calculations. Each of them show the calculations based upon profit.

On 6 March 2023, the VAT assessments were revised upward from the independent review to a final figure of £23,032. The penalties were left unchanged.

On 7 March 2023 Officer Harvey wrote to Mr Buttar making clear HMRC’s position that the letter on 4 July 2023 only settled the Corporation Tax not the VAT.

Sprowston was still aggrieved by HMRC’s decisions on VAT and appealed to the Tribunal.

The law does not appear to be any dispute. The starting proposition is that the value of consideration in money for supplies of goods is that value together with VAT (section 19 (2) VATA)).

Section 73 (1) VATA states:

Subsection 6 states:

Section 77 (4) and (4A) state:

In Van Boeckel v The Commissioners of Customs and Excise [1981] STC 290 (‘Van Boekel) Woolf J (as he then was) said (at pages 292-293):

In CA McCourtie v The Commissioners of Customs and Excise [1992] Lexis Citation 802 (‘McCourtie’) the Tribunal decided that this would mean HMRC should gather the facts objectively and intelligently interpret them, any calculations should be arithmetically sound, and any sampling technique should be representative.

As Taylor J (as then was) put it in Schlumberger Inland Services Inc v Customs and Excise Commissioners [1987] STC 228 in agreeing with Woolf J:

If best judgment has been used the next question is whether the tax payer can show it is more likely than not that the assessment is excessive. InTynewydd Labour Working Men's Club and Institute Ltd v Customs and Excise

Paragraph 1 (1) Schedule 24 of the FA states (in part):

Paragraph 3 states:

Paragraph 11 states:

In Barry Edwards [2019] UKUT 131 (TCC) the Upper Tribunal said in relation to special circumstances (albeit under different legislation, but of which there is no material difference):

Drawing the threads together we derive the following for the purposes of our approach:

We were referred to a number of first instance decisions, but these are inevitably heavily fact dependent. We will apply the principles above to our findings of fact.

We address the arguments raised before us which we have set out above at paragraph []. We have set out the facts at some length so we are able to be relatively brief with our discussion.

In our judgment the time limits have been observed. Until the letter from the ex-agent of Sprowston arrived on 9 March 2021 Officer Harvey did not have much to on beyond the figures Officer Valladares supplied her regarding turnover. The figures used by the accountant upon which Sprowston’s VAT returns were based were central to Officer Harvey. Had she not waited and issued assessments shortly after July 2019 no doubt considerable criticism would follow. Instead, she gathered further evidence.

Section 73 (6) (2) (b) VATA states that an assessment may be made:

Officer Valladares evidence is not reliable or credible as he gave evidence that the increased turnover figures had not been challenged when that was not so, for example, Mr Balasingham’s letter of 24 May 2021. Further, that the final Corporation Tax assessments did not reflect any increase in turnover. Additionally, that as no determination against whether the turnover reflected wages had been made by the Tribunal Officer Valladares was wrong to say that it was.

We do not accept that Officer Valladares evidence is not credible or reliable because he said that the increased turnover had not been challenged. He told us that he thought it had been agreed there was an undeclaration of turnover and the figure would be agreeable. When it wasn’t he accepted turnover had been challenged for example in the letter of 24 May 2021. As to the wages when it was put to him that there was an outstanding Tribunal, he simply said I cannot answer that.

That it is unfair they have not been permitted to appeal the increased turnover by way of the Corporation Tax assessments.

There is nothing unfair about this. Insofar as it impacts upon this Tribunal it was open to Sprowston to put accurate figures of turnover before us if HMRC’s are said to be incorrect. That was not done.

Corporation Tax profits are based upon turnover and the starting point for that, and VAT is turnover.

Whilst that is correct as a statement, it does not affect this case. The Corporation Tax was assessed by Officer Valladares and thereafter a colleague in Sprowston’s favour on profits. No more. The increased turnover was matched by the allowable expenses.

Whilst therefore turnover is the starting point for both tax questions it does not provide the same answer as different considerations are in place.

Having considered the arguments of Sprowston we turn to whether HMRC have demonstrated best judgment.

In our judgment they have. HMRC are not required to do the work of the taxpayer. They performed their task honestly and above board. There can be no suggestion that Sprowston did not have the opportunity at all stages in terms of the assessments to put forward everything they wanted to or could. Once in possession of all the information as can be seen from our findings of fact HMRC considered that material and came to a decision.

Officer Valladeres was fully entitled to come to conclusions about turnover based on the expenditure from the company bank account which could not be explained absent under declaration. From those figures and accepting Sprowston’s previous accountants’ explanations about the level of standard rated goods for VAT purposes, Officer Harvey was entitled to come to the conclusions she did about the level of VAT owed. It was reasonable and not arbitrary based as it was on the material before her. That included bank statements, till reports, and information from the previous accountants. Officer Harvey viewed them objectively and intelligently. She always explained her reasoning.

The alterations in the independent review do not alter that where the reviewer identified calculation errors and these were taken into account in Sprowston’s favour. Those were principally based upon the application of 20% by Officer Harvey rather than 1/6 as the review pointed out. Additionally, Mr Buttar’s points about cash were taken on board and adjustment made. Although Officer Harvey’s calculations were not arithmetically sound, they were corrected in the review.

Overall, in our judgment, HMRC have acted with best judgment.

Turning to whether Sprowston have shown the figures were excessive they have not. Such excess as there has been was cured at the independent review. Nothing was put before us to displace the amounts in the VAT assessments the subject of the appeal.

HMRC have not met the required standard to show the inaccuracies were deliberate so to be ablet to sustain the deliberate penalties. If there are penalties these should be assessed as ‘careless’ and reduced to 18%.

We do not accept Mr Balasingham’s evidence that HMRC have not shown any ‘error’ was deliberate. The inaccuracies here relate directly to matters that Mr Balasingham had direct control over as the director of Sprowson and the expenditure, such as mortgage payments, directly benefitted him.

We are satisfied that HMRC have shown it is more likely than not that Mr Balasingham as the sole director of Sprowston knew that Sprowston was paying his mortgage and other personal expenses. Although his former accountants corresponded with HMRC it was Mr Balasingham who provided them with the underlying documentation in order to do so. That contained material that underdeclared Sprowston’s turnover. Beyond denying it, no explanation has been offered. HMRC accepted that it was not based upon the till zero rating goods when they should have been standard rated as that was corrected by the previous accountants in the submissions of the VAT returns. The only explanation left is that over six years the accountants were not put in the full picture and deliberately so. It can only have been as a result of a decision that was thought about. The coincidence of carelessly failing to declare the full amount of turnover when such personal payments were made is too much.

The personal liability notice was entirely properly made in the circumstances outlined.

As to any special reduction, although this has not been argued we consider it as we must. We can only interfere if HMRC’s decision was flawed in a public law sense. For the reasons given in the review we detect no public law flaw. HMRC were entitled to take the view that the information asserted did not amount to a reason to apply a special reduction within the test set out in Barry Edwards.

For those reasons the appeal is 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.