Massala Exotic Limited v The Commissioners for HMRC

It is for HMRC to prove, on the balance of probabilities, that they issued a valid in time best judgement assessment to the company and notified the company of that assessment.

If they establish that, then the burden shifts, and it is up to the company to show, on the balance of probabilities, that the assessment overcharges it.

It is for HMRC to show, on the balance of probabilities, that they have issued a valid in time penalty notice in respect of the company penalty. It is therefore for HMRC to establish that the company was “guilty” of submitting incorrect VAT returns based on deliberate behaviour.

It is also for HMRC to show, on the balance of probabilities, that the company penalty can be visited on Mr Miah as the company penalty is attributable to his behaviour.

In summary Ms Donovan submitted as follows:

The VAT assessment was made to best judgement. It was based on a comparison of the declared sales with the sales evidenced by the merchant acquirer data. This revealed a substantial difference between the two.

The method used by Officer Wells to generate the assessable amount of sales was an appropriate and valid method.

His use of 72% as the proportion of sales paid for by card, as evidenced by the proportion on the date of the unannounced visit, is an appropriate percentage. It is in line with the 70% to 80% figure given by the second appellant at the unannounced visit.

There was no evidence of either the first appellant or JM or AM using different card machines, nor of a second bank account into which payments from those machines used by Spice Master, or JM’s companies at the time of the VAT assessment.

The information relating to the ostensible use of the card machines by others was provided only in March 2021. There is no evidence of any family agreement regarding the use of the card machines. No contracts for the procurement of the card machines and subsequent lending have been supplied.

There is no credible evidence to support the appellants’ submission of the use of these card machines by others.

The first appellant was responsible for providing the sales figures to its accountant who compiled the VAT returns. In turn, those figures were provided through the agency of the second appellant. Both the first appellant and the second appellant, therefore, knew that those figures were wrong. This demonstrates deliberate behaviour.

Furthermore, the errors in the returns have been repeated over an extended period of time.

The adjustments to the company penalty for telling helping and giving access are reasonable and proportionate.

In summary Mr Shahabuddin submitted as follows:

The VAT assessment was not made to best judgement. HMRC’s case is based on the fact that the payments into the Lloyds bank account ending 6568 stemmed from the first appellant’s trading. The evidence shows that this is not correct. There were three card machines. The statement by JM and AM make it clear that the first appellant helped them each to acquire a card machine which they, respectively, used in their businesses. Although the takings, therefore, went into the Lloyds bank account, they were paid out to the businesses as evidenced by the Lloyds bank schedule. The only takings which are attributable to the first appellant are those in the HSBC bank account ending 8140.

Officer Wells was aware of the fact that there were three card machines when he made the VAT assessment.

HMRC have accepted in their statement of case that the bank statements show that those payments were paid out to the two businesses owned by the director’s family members.

The Lloyds bank account schedule and the HSBC bank statements corroborate the appellants’ version of events.

Corroboration is also provided by the statement of JM and KM each dated 18 March 2021 in which they both say that having tried to obtain card machines from various banks, in which venture they were unsuccessful, the second appellant assisted them to acquire a credit card machine. The statement also confirmed that the monies were transferred from the Lloyds bank account to their respective business bank accounts, and that their businesses had paid VAT on the amounts so transferred.

HMRC, therefore, will recover VAT twice on the same amounts if we uphold the VAT assessment (once in the hands of the first appellant and subsequently in the hands of Spice Master and JM’s companies).

HMRC have not established deliberate behaviour.

The appellant acted in good faith and did not benefit personally.

HMRC’s letter of 14 September 2020 which imposes the liability for the company penalty on the second appellant (i.e. the PLN) states that “you are personally liable to pay because we believe that the company is either insolvent or likely to become insolvent”. This is not the law. HMRC cannot impose a PLN based on the insolvency of the first appellant. There must be a deliberate inaccuracy by the company and an officer who was knowingly responsible for that deliberate inaccuracy. This means that the PLN is unlawful and should be cancelled.

The PLN should be mitigated as the second appellant has suffered financial hardship and mental distress. He has provided documents as and when requested and has not been obstructive.

HMRC are rejecting the evidence provided in March 2021 simply because it was supplied 16 months after the assessments. This is wholly inappropriate.

There has never been no deliberate behaviour. HMRC have not established that any errors were deliberate. Indeed, there have been no errors because the first appellant has accounted for the sales which it made and is not responsible for VAT on the sales made by Spice Master and JM’s companies. It was those companies, and not the first appellant, which made those sales (by the use of the card machines procured and lent to them by the second appellant).

There is no statutory requirement for the appellants to provide contractual documentation to evidence the use of the card machines.

We start by considering whether the VAT assessment was made to best judgement. This is a low bar. All HMRC need to do is show that Officer Wells fairly considered all the material which was before him and came to a decision which was reasonable and not arbitrary. They need to show that the assessment is consistent with an honest and genuine attempt to make a reasoned assessment of the VAT payable. Indeed, an assessment which appears to be unreasonable or wholly unreasonable may still be the result of an honest and genuine attempt to assess the VAT properly due.

We therefore need to consider the information which was used by Officer Wells at the date of the VAT assessment (22 November 2019) and the way which he used or processed that information in order to reach the numbers set out in his assessment.

In summary:

He had attended the first appellant’s premises at an unannounced visit on 23 November 2018.

He had seen from the till receipts that the proportion of sales made by card was 72%.

He had been told by the second appellant that the proportion of card sales was between 70% and 80%.

He saw that only a single card machine was in use.

He acquired merchant acquirer data (reflecting payments made by card) for the period 1 July 2013 to 30 June 2016.

He compared these amounts with those declared on the first appellant’s VAT returns and undertook the process set out at [9(7)-11)] above.

He sought further information from the appellants and those advising them. He followed this up with an information notice. No further information was forthcoming.

He attended a meeting on 17 October 2019 at which the second appellant and AM were both present. The notes of that meeting made no mention that AM was using a card machine procured by the second appellant.

At that meeting, the second appellant denied that a second bank account was in use and he only had a single business bank account. He also denied that there were any errors.

He had been told that the second appellant was responsible for providing the information regarding turnover to the company’s agent who was in turn responsible for taking that information and putting it into the company’s VAT return.

We have no hesitation in concluding that the VAT assessment was made to best judgement by Officer Wells.

It was based on empirical evidence. He had the evidence of the VAT returns. He had the evidence from the merchant acquirer data which provided evidence of card sales. He grossed those up at an appropriate rate. For those years in which he did not have the merchant acquirer data, he simply used the sales figure for the last year in which he did have that data. He could have uplifted this by RPI but didn’t (thus benefitting the first appellant).

He had not been told, either in correspondence when seeking information from the appellants, nor at the unannounced visit, nor at the meeting on 17 October 2019, that there was more than one card reader.

We find this as a fact. Notwithstanding the submission by Mr Shahabbudin that he was in possession of the knowledge that there were three card readers, we can find no evidence corroborating that this was the case on the date on which the VAT assessment was made. The first time (on the evidence presented to us) that HMRC were made aware of the appellants’ story that there were three card readers, was on 26 March 2021 when the statements made by JM and AM of 18 March 2021 were sent to HMRC.

And while this information is relevant to whether the first appellant can displace the VAT assessment on the basis that it overcharges it, it is not relevant to the issue of best judgement which must be tested at the date on which the assessment was made.

The unannounced visit took place on 23 November 2018. The VAT assessment was issued on 22 November 2019. This is within one year. The basic time period for issuing the assessment is one year after evidence of facts sufficient in the opinion of HMRC to justify making the assessment, comes to their attention. It was not until the merchant acquirer data was procured that those facts were sufficient. This must have been after 23 November 2018 (we do not have evidence of the precise date). So this was well within HMRC’s one-year period.

The general rule is that assessments must then be made within four years after the end of the relevant accounting period, but this is extended to 20 years where deliberate behaviour is established.

We discuss deliberate behaviour below and have decided that the first appellant’s behaviour through the agency of the second appellant, in failing to accurately record and disclose its sales in the VAT returns for the relevant periods is based on deliberate behaviour.

We have therefore concluded that the VAT assessment is a valid in time best judgement assessment which has been properly notified to the appellants.

The burden now switches to the first appellant to establish that, on the balance of probabilities, that assessment overcharges it.

The case, in a nutshell, is set out in the submissions above. Namely that there were three card machines, only one of which was used by the first appellant, the other two having been procured by the second appellant and lent to AM and JM for use in their businesses. Card receipts from those two other machines were credited to the Lloyds bank account ending 6568 and then paid to accounts in the names of those other businesses.

The evidence for this is twofold. Firstly, the written statements provided to HMRC by AM and JM on 18 March 2021. Secondly, the bank account details including the Lloyds bank spreadsheet and the HSBC statements.

We first consider the more direct evidence, namely the written statements referred to above, and the oral evidence given by Mr Shahabuddin.

When considering this evidence, we note the following:

Directions issued by Judge Bailey on 2 March 2024 directed that witness statements should be exchanged and that any party wishing to rely on witness evidence should call that witness to be available at the hearing.

A letter to the appellant’s representative dated 18 October 2024 from the tribunal stated that “you have stated that… neither appellant will [not] be calling any witnesses. Please note that if Mr Miah does not file a witness statement then he cannot tell the Tribunal of any facts that have occurred. Therefore as matters currently stand, the appellants have neither documentary evidence not spoken evidence to support their appeal…”.

Mr Miah did not attend to give oral evidence, nor did he file a witness statement.

Neither AM or JM attended to give oral evidence, nor did they file witness statements.

Their letters of 21 March 2021 contain no statement of truth.

No application under the Civil Evidence Act 1995 was made for the admissibility of hearsay evidence.

In his statement, JM says that he used the card machine procured by the second appellant from February 2013 to September 2017.

In his statement, AM says that he had started trading in 2014. It clearly implies that he started using the card machine procured by the second appellant at around that date.

Mr Shahabuddin, in his submissions, said that there were three card machines. Yet in his witness statement, which he says is based on records and representations from the second appellant, he says that a card machine had been procured by the second appellant which was initially lent to Bayview, and “Once [Bayview] stopped using the… machine, [the second appellant] re-lent the… machine [Spice Master]”.

In other words, his witness evidence is that there were only two machines (and not three as he had submitted and which is clearly implicit in the statements from AM and JM) and the second machine was used sequentially by the businesses owned by those two gentlemen (which is in direct contradiction to their statements which were that they were used in their businesses during the relevant period, and which, in their view, is evidenced by the Lloyds bank account schedule).

The Lloyds bank schedule shows payments out being made throughout the relevant periods.

AM and JM are blood relations of the second appellant.

KM had said to Officer Wells, at the meeting on 17 October 2019 that he had only one bank account. This is clearly not the case. At that stage he had both the Lloyds bank account and the HSBC bank account.

The assertion in Mr Shahabuddin’s evidence that the bank account information showed that the second appellant charged between £150-£200 per month lending “his PDQ machine” (note the singular). We were not taken to any such entries, and we could see no evidence in the bank account information with which we were provided of these payments.

The inconsistencies regarding bank accounts for AM and JM as set out in the letter dated 30 June 2021 and recorded at [9 (33)-(34)] above.

When considering the totality of the relevant evidence, we can take into account hearsay evidence. The statements by JM and AM fall into that category. The Civil Evidence Act (section 4) sets out that when considering the weight (if any) to be given to hearsay evidence, we can have regard to any circumstances from which any inference can reasonably be drawn as to the reliability or otherwise of the evidence. It further sets out a number of specific factors which we may have regard to. These include; whether it would have been reasonable and practical for the evidence to be given in person; whether it was made contemporaneously; and whether any person had a motive to conceal or misrepresent matters.

It is clear that Mr Shahabuddin and the appellant’s previous advisers have taken, at face value, the information provided by JM and AM.

We have not. We attribute no weight to their statements. There are clearly inconsistencies between what they say and the oral evidence given by Mr Shahabuddin regarding the number of card machines and their use. There are inconsistencies regarding bank accounts. No mention is made of there being more than one card machine at the meeting on 17 October 2019. We understand that they might wish to assist the second appellant, but they clearly have a motive in doing so. They are related by blood. There is no reason why they could not have attended and given evidence in person. The same is true of the second appellant. He did not even tender a witness statement which contained the statement of truth. The best we have are his submissions set out in the grounds of appeal. Mr Shahabuddin, on his own admission, has based his evidence on what he was told by the second appellant. He only became instructed in 2024 long after the relevant periods.

We now turn to the bank evidence.

Firstly, the summary and schedules relating to the Lloyds bank account ending 6568.

This records that during the relevant periods, payments were made out of that account of £473,885.17 to “Cardiff Bay” and £454,402.81 were made to JUBORAJ group.

The only explanation we have had for these payments is set out in the appellants’ submissions and in the statements of AM and JM.

There is nothing in schedules themselves which suggests that these are payments which were made for meals supplied by those recipients. This is filled in by those explanations, and we have rejected the veracity of those explanations.

We also note, as mentioned by HMRC, that the schedule supporting the summary which evidence the payments do so in mainly round terms and do not record pence. This is something which seems too pat. It is likely that the sales would have been in pounds and pence, and if pence were recorded on some occasions, why were they not recorded on others.

There could be any number of reasons why those payments were made, and not that they were payments for meals supplied by anyone other than the first appellant.

What we were told were the HSBC bank statements tell us, effectively, nothing. There are entries which we were told reflected takings, but we were told that by Mr Shahabuddin. There was no oral evidence from the second appellant that this was the case.

The documents that we saw did not identify an account number, or name. We are being asked to take, effectively on faith, the fact that the receipts into that account were the only receipts reflecting sales made by the first appellant.

We therefore place little weight on the bank documents which have been provided as corroboration for the appellants’ story regarding the multiple card machines, and that the payments set out in the Lloyds bank schedule reflected payments for meals provided by businesses run by AM and JM.

Finally, we have undertaken a modest verification exercise. The period in which the Lloyds bank schedule records payments to Cardiff Bay and JUBORAJ starts on 1 May 2013 and ends on 30 September 2019. That is approximately 2,340 days. The payments out total £928,287.

That is approximately £396 per day. The seating capacity of the restaurant operated by the first appellant was 90. It is, to our minds, entirely reasonable that a restaurant of that size could have taken an additional £396 per day.

Mr Shahabuddin submits that HMRC have accepted those payments from the Lloyds account are payments to businesses run by JM and AM by dint of a “concession” to that effect in HMRC’s statement of case. We reject this submission. All HMRC are recording in that element of their statement of case is the appellants’ case. It reflects no such concession.

The burden of establishing that the VAT assessment overcharges the first appellant rests with the first appellant. It must demonstrate that on the balance of probabilities it has been overcharged. Its case is that there were three card machines, two of which were used by AM and JM and only one of which was used by the first appellant. The takings from the businesses owned by AM and JM were paid into a Lloyds bank account and redistributed.

We have rejected this story. There is no compelling admissible evidence which supports it.

From the primary facts, we have drawn the inference that there was only a single card machine used by the first appellant in its business and the payments out of the Lloyds account were not payments for the supply of meals by businesses run by JM and AM. We find this as a fact.

In drawing this inference, we have adopted the test set out by Arden LJ in Barlow Clowes International Ltd v Henwood [2008] EWCA Civ 577, in which she said at [68]:

“… The ultimate fact in issue was Mr Henwood’s intention. This had to be a matter of inference from all the relevant facts, giving such weight to Mr Henwood’s declarations as to his own intention as the law allows. An inference of this kind must be drawn on the balance of probabilities, and thus the judge had to be satisfied that the inference that he drew as to Mr Henwood’s intention was more likely than not on all the relevant and proved facts”.

We therefore uphold the VAT assessment in the amount assessed.

We now consider the penalties. For the company penalty, it is for HMRC to demonstrate that the inaccuracies in the VAT returns for the relevant periods were caused by the deliberate behaviour of the first appellant (through the agency of the second appellant).

The test for deliberate behaviour, set out in Tooth and confirmed in CF Booth Ltd v HMRC [2022] UKUT 217 is straightforward. HMRC need to show an intention to mislead HMRC on the part of the first appellant as to the truth of the relevant statement. This essentially means that in this case they must show that the first appellant has knowingly provided HMRC with documents (the VAT returns for the relevant periods) which contained errors (the failure to account for VAT on the true sales of meals) with the intention that HMRC should rely upon them as accurate documents.

We have found as a fact that there was only one card machine and that the payments purportedly made out of the Lloyds bank account were not takings from businesses run by JM or AM. And that the VAT assessments reflect additional takings by the first appellant.

Throughout the relevant periods, the second appellant was the sole director of the first appellant. It is recorded that it was he who supplied the information regarding the first appellant’s takings to the agent who then put them into the relevant VAT return.

When doing this, the second appellant knew that the takings he reported were inaccurate. They did not include the payments made into the Lloyds bank account.

These inaccuracies persisted over a number of years.

The penalty explanation letter describes the inaccuracy as being output tax underdeclared over a period of four years as evidenced by the merchant acquirer data; no explanations have been given for this; this is deliberate behaviour to suppress the true amount of sales.

We agree. The first appellant through the agency of the second appellant knew the level of sales to be incorrect. The second appellant passed this on to the agent to be included in the first appellant’s VAT returns with the intention that HMRC would rely upon those returns as accurate documents. This is deliberate behaviour.

We therefore find that the company penalty is a valid in time penalty.

In order to visit a valid PLN on the second appellant, HMRC must show that the company penalty is a result of a deliberate inaccuracy which is attributable to an officer of the company.

This is clearly the case here. The deliberate inaccuracy in the VAT returns is attributable to the second appellant who was responsible for providing information about the level of sales, to the agent.

Mr Shahabuddin submits that the PLN is invalid because the notice of it, visiting personal liability on the second appellant, dated 14 September 2020, states that the reason for personal liability was because the company is either insolvent or likely to become insolvent. And this is not a statutory prerequisite to issuing a PLN.

We certainly agree that it is not a statutory prerequisite. However, all that HMRC have to show is there was a deliberate inaccuracy which is attributable to an officer of the company. They have done this.

That is a question of fact for us to decide. If we were being asked to review the reasonableness of the PLN, then the ostensible reason given by Officer Wells, in the PLN, might be relevant and might affect the reasonableness of his decision (having said that, in the PLN itself it says “you are personally liable to pay [the company penalty] because we have charged it because of your actions”).

This is not a case about the reasonableness of HMRC’s decision. It is a case which concerns whether the prerequisites for the issue of a PLN have been made out and made out to us. They have been.

We have found that the VAT assessment is a valid in time best judgement assessment. We have rejected the evidence submitted by the appellants that there were three card machines, two of which were used by businesses run by JM and AM. We have found as a fact that there was only a single card machine and that all monies that were paid into the Lloyds bank account were takings from the first appellant’s business and did not reflect takings from businesses run by JM and AM.

The appellants have not displaced the VAT assessment and demonstrated that it overcharges the first appellant.

We have found that the VAT returns during the relevant periods understated the takings of the first appellant, and that was a result of deliberate behaviour by the second appellant. He provided inaccurate information to the agent knowing that the agent would include it in the VAT returns and that HMRC would rely on it. The company penalty is valid.

We have found that those deliberate inaccuracies were attributable to the actions of the second appellant.

Accordingly, we dismiss the appeals.

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.

By virtue of section 73(1) Value Added Tax Act 1994 (“VAT Act”), where it appears to HMRC that tax returns made by a taxpayer are incomplete or incorrect, HMRC may assess the amount of VAT due from him to the best of their judgment and notify it to him.

Under section 73(6) VAT Act an assessment must be made not later than either 2 years after the end of the prescribed accounting period or 1 year after evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to their knowledge (whichever is the later).

This is, however, subject to the general rule that the time limit for making an assessment is capped at 4 years after the end of the relevant accounting period. This is found in section 77(1) VAT Act 1994.

This time limit is extended by virtue of section 77 (4) and (4A) VAT Act where deliberate or deliberate and concealed behaviour is established. In these circumstances, the assessment period is 20 years after the end of the prescribed accounting period.

Section 83 VAT Act provides:

“Subject to section 84, an appeal shall lie to a tribunal with respect to any of the following matters...”.

There is then set out a series of actions, decisions, and other matters arising under the Act listed under paragraphs (a) to (z). Paragraph (p) is as follows:

“An assessment-

(i)

under section 73(1) or (2) in respect of a period for which the appellant has made a return under this Act....

or the amount of such an assessment”.

In Van Boeckel v Customs and Excise Commissioners [1981] AER 505 (“Van Boeckel”) the High Court (Woolf J as he then was) considered the application of best judgment.

“...It should be recognised...that the Commissioners should not be required to do the work of the taxpayer in order to form a conclusion as to the amount of tax which, to the best of their judgement is due. In the very nature of things frequently the relevant information will be readily available to the taxpayer, but it will be very difficult for the commissioners to obtain that information without carrying out exhaustive investigations. In my view, the use of the words ‘best of their judgment’ does not envisage the burden being placed on the commissioners of carrying out exhaustive investigations. What the words ‘best of their judgement’ envisage, in my view, is that the commissioners will fairly consider all material placed before them and, on that material, come to a decision which is one which is reasonable and not arbitrary as to the amount of tax which is due”.

In the Court of Appeal decision of Customs & Excise Commissioners v Pegasus Birds Ltd [2004] EWCA Civ 1015, that court approved the approach of Woolf J. It went on to add that the tribunal’s primary task is to find the correct amount of tax on the basis of the material before it and in all but very exceptional cases this should be the focus of the hearing; any mistake which I consider that HMRC has made in its assessment may still be to best judgment if it is consistent with an honest and genuine attempt to make a reasoned assessment of the VAT payable; and an assessment which appears to be unreasonable or wholly unreasonable may still be the result of an honest and genuine attempt to assess the VAT properly due.

As regards time limits, these were considered in the High Court decision of Pegasus Birds ([1999] BVC 56) in which Mr Justice Dyson set out the legal principles to be applied as follows:

“1.

The Commissioners' opinion referred to in section 73(6)(b) is an opinion as to whether they have evidence of facts sufficient to justify making the assessment. Evidence is the means by which the facts are proved.

2.

The evidence in question must be sufficient to justify the making of the assessment in question: C & E Commissioners v Post Office [1995] STC 749, 754G.

3.

The knowledge referred to in section 73(6)(b) is actual, and not constructive knowledge: C & E Commissioners v Post Office at p755D. In this context, I understand constructive knowledge to mean knowledge of evidence which the Commissioners do not in fact have, but which they could and would have if they had taken the necessary steps to acquire it.

4.

The correct approach for a Tribunal to adopt is (i) to decide what were the facts which, in the opinion of the officer making the assessment on behalf of the Commissioners, justified the making of the assessment, and (ii) to determine when the last piece of evidence of these facts of sufficient weight to justify making the assessment was communicated to the Commissioners. The period of one year runs from the date in (ii): Heyfordian Travel Ltd v C & E Commissioners [1979] VATTR 139,151; and Classicmoor Ltd v C & E Commissioners [1995] V &DR 1, 10.I.27.

5.

An officer's decision that the evidence of which he has knowledge is insufficient to justify making an assessment, and accordingly, his failure to make an earlier assessment, can only be challenged on Wednesbury principles, or principles analogous to Wednesbury: Classicmoor paras 27 to 29; and more generally John Dee Ltd v C & E Commissioners [1995] STC 941, 952D-H.

6.

The burden is on the taxpayer to show that the assessment was made outside the time limit specified in section 73(6)(b) of VATA”.

Generally, the burden lies on the taxpayer to establish the correct amount of tax due:

“The element of guesswork and the almost unavoidable inaccuracy in a properly made best of judgment assessment, as the cases have established, do not serve to displace the validity of the assessments, which are prima facie right and remain right until the taxpayer shows that they are wrong and also shows positively what corrections should be made in order to make the assessments right or more nearly right." (Bi−Flex Caribbean Ltd v Board of Inland Revenue (1990) 63 TC 515, 522−3 PC, per Lord Lowry)”.

Pursuant to s 97 of the Finance Act 2007, provisions imposing penalties on taxpayers who make errors in certain documents, including VAT Returns, are contained in schedule 24 of that Act. All subsequent references to paragraphs, unless otherwise stated, are to the paragraphs of that schedule to the Finance Act 2007.

Paragraph 1 provides:

Paragraph 3 provides:

The amount of a penalty, payable under paragraph 1, is set out in paragraph 4. In so far as it applies to the present case, paragraph 4(2) provides that the penalty for careless action is 30% of the potential lost revenue; for deliberate but not concealed action, 70% of the potential lost revenue; and for deliberate and concealed action 100% of the potential lost revenue.

The “potential lost revenue” is defined in paragraphs 5 – 8 but for present purposes it is only necessary to refer to paragraph 5(1) which provides:

Paragraph 9 provides:

Under paragraph 10(1) HMRC “must” reduce the standard percentage of a person who would otherwise be liable to a penalty. However, the table in paragraph 10(2) sets out the extent of any reduction which must not exceed the minimum penalty which for a prompted deliberate and not concealed error is 35% of the potential lost revenue and for a prompted careless error is 15%.

HMRC may also reduce a penalty because of “special circumstances” under paragraph 11 although the ability to pay or the fact that a potential loss from one taxpayer is balanced by a potential payment from another are precluded from being special circumstances by paragraph 11(2).

Paragraph 19(1), which provides for the imposition of a PLN on a director, states: Where a penalty under paragraph 1 is payable by a company for a deliberate inaccuracy which was attributable to an officer of the company, the officer is liable to pay such portion of the penalty (which may be 100%) as HMRC may specify by written notice to the officer. An “officer” of a company includes a director and a shadow director (paragraph 19(4)(a)). Also, HMRC are precluded from collecting more than 100% of a penalty (paragraph 19(2)).

It is clear from the decision of the Upper Tribunal in Zaman v HMRC [2022] UKUT 252 (TCC) at [23] that in the absence of an appeal against a s 73 VATA assessment by a company where a PLN on its director is challenged on the basis that an underlying assessment is wrong, it is for HMRC to establish that the PLN was validly issued and, if that burden is discharged, the evidential burden is on the appellant to establish that the assessment should be discharged in the same way as it would have been on the company to establish that it had been overcharged by the assessment if it had decided to bring an appeal against that assessment.

On an appeal against a decision that a penalty is payable the Tribunal may, under paragraph 17(1), affirm or cancel HMRC’s decision. However, where the appeal is against the amount of a penalty paragraph 17(2) allows the Tribunal to substitute HMRC’s decision for another decision provided that it was within HMRC’s power to make the substituted decision.

With regard to a reduction of a penalty in relation to special circumstances (pursuant to paragraph 11), under paragraph 17(3), the Tribunal may only substitute its decision for that of HMRC if it “thinks that HMRC’s decision in respect of the application of paragraph 11 was flawed.” If so, paragraph 17(6) provides that:

“Flawed” means flawed when considered in the light of the principles applicable in proceedings for judicial review.

The Supreme Court considered the meaning of “deliberate” in relation to whether there was a deliberate inaccuracy in a document in HMRC v Tooth [2021] 1 WLR 2811 in which it said:

“42.

The question is whether it means (i) a deliberate statement which is (in fact) inaccurate or (ii) a statement which, when made, was deliberately inaccurate. If (ii) is correct, it would need to be shown that the maker of the statement knew it to be inaccurate or (perhaps) that he was reckless rather than merely careless or mistaken as to its accuracy.

43.

We have no hesitation in concluding that the second of those interpretations is to be preferred, for the following reasons. First, it is the natural meaning of the phrase “deliberate inaccuracy”. Deliberate is an adjective which attaches a requirement of intentionality to the whole of that which it describes, namely “inaccuracy”. An inaccuracy in a document is a statement which is inaccurate. Thus the required intentionality is attached both to the making of the statement and to its being inaccurate”.

Although this was said in relation to a different statutory provision (s 29 of the Taxes Management Act 1970) the Supreme Court recognised, at [33] and [45], the alignment of the language used with that of the schedule 24 penalty provisions. Accordingly, for there to be a “deliberate” inaccuracy HMRC have to establish an intention “to mislead the Revenue on the part of the taxpayer as to the truth of the relevant statement” (see Tooth at [47]).