CPR COMMERCIALS LIMITED v THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMS

The Appellant, CPR Commercials Limited (‘CPR’), sold used commercial vehicles to customers. During VAT accounting periods 08/12 to 10/15, CPR sold vehicles to customers registered for VAT in Ireland and treated those supplies as exports which were zero-rated for VAT purposes. HMRC were not satisfied that CPR had provided sufficient evidence that goods supplied by it to customers based outside the UK had been dispatched/exported outside of the UK (and therefore there was no right to zero-rate those supplies). In a series of decisions issued in 2015-2017, HMRC assessed CPR for VAT of £98,820 and penalties of £58,340. The penalty assessments were issued under paragraph 1 of Schedule 24 to the Finance Act 2007 (‘FA 2007’) on the ground that CPR’s VAT returns contained inaccuracies in that they treated supplies as zero-rated when CPR did not hold evidence to support zero-rating of those supplies. HMRC calculated the penalties on the basis that that the inaccuracies were deliberate on the part of CPR.

CPR appealed to the First-tier Tribunal (Tax Chamber) (‘FTT’) against the assessments and the penalties. CPR contended that it was not liable to pay the VAT assessed because the supplies to which the assessments related were properly zero-rated as exports. In relation to the penalties, CPR’s primary case was that there were no inaccuracies in its returns because the supplies had been properly zero-rated but, if it was wrong in that contention, then the inaccuracies were not deliberate. In relation to the penalties, HMRC contended that CPR’s conduct was deliberate or, in the alternative, that CPR did not take reasonable care when submitting their VAT returns, ie that it made a careless error.

In a decision released on 15 November 2021 with neutral citation [2021] UKFTT 408 (TC) (‘the Decision’), the FTT (Judge Fairpo and Tribunal Member L Brown) found that CPR had not obtained and retained appropriate evidence of export to support zero-rating of the relevant transactions and that CPR should, therefore, have charged and accounted for VAT at the standard rate on those supplies. The FTT further held that requiring evidence of export in the circumstances of the case did not breach the principle of proportionality.

In relation to the penalties for deliberate inaccuracies, the FTT made various findings (set out in more detail below) and concluded in [124] of the Decision that:

With the permission of the Upper Tribunal (‘UT’), CPR appealed against the Decision on a single ground:

In short, CPR submitted that a deliberate inaccuracy requires a finding that the taxpayer knew that a document contained an error and provided it to HMRC with the intention that HMRC should rely on the documents as accurate. Anything less than subjective knowledge, including recklessness as to whether there was an error in a VAT return, does not constitute deliberate behaviour although it may properly found a careless penalty. CPR contended that the FTT did not find that CPR had subjective knowledge of any inaccuracy in its VAT returns or that CPR had suspected that the returns contained inaccuracies which it had deliberately chosen to ignore. Accordingly, the FTT erred when it found that, in being reckless as to whether it had the evidence required to zero-rate the supplies, CPR made a deliberate inaccuracy in its returns.

In summary, HMRC submitted that, properly analysed, the findings of fact were findings that CPR had actual or, at the very least, blind-eye knowledge that the returns submitted contained inaccuracies. Ms Robinson, who appeared for HMRC, was very clear that HMRC had not advanced any case on recklessness before the FTT and did not invite us to consider whether recklessness on the part of a taxpayer might satisfy the ‘deliberate inaccuracy’ test. (We record that HMRC’s acceptance that this is the test goes no further than this particular case).

In light of the parties’ agreement on this point about recklessness, the issues are:

We begin by looking at the penalty legislation in Schedule 24 FA 2007 and then move on to consider the FTT’s analysis and findings.

The penalties were issued under Paragraph 1 of Schedule 24 FA 2007 which provides:

Paragraph 3 of Schedule 24 FA 2007 provides:

Paragraph 4 of Schedule 24 FA 2007 sets out the standard amounts of penalty for the different categories of inaccuracy. For a ‘category 1’ inaccuracy (which applies in the present case) the penalty payable (subject to any reduction for disclosure) is: for a careless inaccuracy 30% of the potential lost revenue, for a deliberate but not concealed inaccuracy 70% of the potential lost revenue, and for a deliberate and concealed inaccuracy 100% of the potential lost revenue.

Paragraph 5 of Schedule 24 FA 2007 provides:

Paragraphs 9 and 10 provide for reductions in penalties where the person has disclosed, inter alia, inaccuracies to HMRC. The penalties in this case were reduced by HMRC on the basis that CPR had made a prompted disclosure. Paragraph 11 provides that HMRC may reduce a penalty if they think it right to do so because of special circumstances. It was not suggested that there were any relevant special circumstances in the case of CPR.

Paragraph 14 states that HMRC may suspend all or part of a penalty for a careless inaccuracy subject to compliance with specified conditions but there is no power to suspend a penalty for a deliberate inaccuracy.

Paragraphs 15 and 16 relate to the bringing of appeals against penalties. Paragraph 17(2) provides that, on appeal, the FTT may affirm HMRC’s decision, or substitute for HMRC’s decision another decision that HMRC had power to make.

Paragraph 19(1) of Schedule 24 FA 2007 provides:

In Auxilium, the FTT (Judge Greenbank and Tribunal Member Bell) considered the meaning of “deliberate inaccuracy” in the context of the Schedule 24 FA 2007 penalty regime and held at [63] – [64]:

Following Auxilium, the issue of the correct meaning of “deliberate inaccuracy” came before the Supreme Court in HMRC v Tooth [2021] UKSC 17. In that case, the Supreme Court considered the correct approach to deliberate and careless conduct in the context of the discovery assessment provisions contained in section 29 of the Taxes Management Act 1970 (‘TMA 1970’) as interpreted by section 118(7) TMA 1970. Although Tooth concerned a different provision, the Supreme Court noted, at [27] of the judgment, the “broadly similar differential treatment of careless and deliberate conduct … reflected in different levels of penalty which may be imposed … [pursuant to] Schedule 24 of the Finance Act 2007.” In Tooth, the Supreme Court posed the following question, and provided its answer to that question:

The next case to consider the meaning of “deliberate inaccuracy” was CF Booth Ltd v HMRC [2022] UKUT 217 (TCC) (‘CF Booth’). In CF Booth, the UT (Mrs Justice Bacon and Judge Brannan) expressly approved of [63] and [64] of Auxilium. At [38] – [41], the UT said:

As already explained, the parties agreed before the FTT that, as stated by the FTT in Auxilium and endorsed by the UT in CF Booth, the test for deliberate inaccuracy in Schedule 24 FA 2007 is a subjective one which requires proof that the taxpayer knowingly provided HMRC with a document which contained an inaccuracy, intending that HMRC rely upon it as accurate.

HMRC contended that the test may be satisfied by proof of ‘blind-eye’ or ‘Nelsonian’ knowledge of the inaccuracy (see Clynes v HMRC [2016] UKFTT 369 (TC) at [86] and Chohan Management Ltd v HMRC [2021] UKFTT 0196 (TC) at [111] – [113]). Mr Bedenham for CPR did not disagree with that proposition but, as we set out in more detail below, submitted that the FTT did not make any finding that CPR took a deliberate decision to shut its eyes to the truth or refrain from making further enquiries so as to avoid discovering the true position. Ms Robinson for HMRC contended that the FTT found that CPR had actual or, at the very least, blind-eye knowledge that the returns submitted contained inaccuracies.

In our view, where a taxpayer suspects that a document contained an inaccuracy but deliberately and without good reason chooses not to confirm the true position before submitting the document to HMRC then the inaccuracy is deliberate on the part of the taxpayer. If it were otherwise then a person who believed there was a high probability that their return contained errors but chose not to investigate would never be subject to a deliberate penalty. However, the suspicion must be more than merely fanciful. Lord Scott of Foscote urged caution in this context in Manifest Shipping Co Ltd v Uni-Polaris Insurance Co Ltd [2001] UKHL 1 at [116]:

Although the concepts of blind-eye knowledge and recklessness as to the truth or falsity of a statement may intersect, they are clearly not identical. As we have already stated, HMRC did not ask us to consider whether an inaccuracy is deliberate where a taxpayer is reckless as to whether the document contains any errors. In the absence of any argument on the point from HMRC, and because it is not necessary for the purposes of this decision, we do not consider whether recklessness is a sufficient basis for determining that an inaccuracy is deliberate further in this decision, and make no comment either way.

CPR is a company. In relation to any question of what CPR knew and intended at any particular time, it is the knowledge and intention of its director, Mr Wright that must be considered. The FTT recorded in [31] that Mr Wright accepted that he was aware of VAT Notice 725 and the requirement to obtain evidence of export within three months of supply of the vehicle. It seems that Mr Wright did not challenge HMRC’s evidence, referred to in [44] and [45], that CPR had been assessed for VAT on the ground that it lacked evidence of export in 2008 and 2011.

In [82], the FTT considered whether CPR knew and could prove that the vehicles had been exported from the UK. The FTT concluded that:

Again, at [106] – [108], the FTT set out its conclusions that CPR had made certain assumptions about what was required for zero rating supplies:

When considering CPR’s contention that the requirement to provide specific documents as evidence of entitlement to zero rate supplies was disproportionate, the FTT observed at [116]:

Specifically in relation to the penalties, the FTT found in [122] that HMRC had previously assessed CPR for VAT assessments on the basis that it did not have adequate export evidence and that HMRC had drawn CPR’s attention to the requirements in VAT Notice 725 and Mr Wright was aware of the Notice. The FTT observed in [123] that it was perplexed by the fact that CPR had continued to zero-rate supplies for which it had no evidence of export and there was no evidence that it had sought any advice about how to comply with Notice 725. The FTT then gave its conclusion in [124] set out in [4] above and dismissed CPR’s appeal.

CPR made an in time application to the FTT for permission to appeal. In relation to the penalties, CPR sought to appeal on the ground that, in [124], the FTT erred by wrongly treating behaviour that it found was reckless as constituting deliberate conduct for the purposes of Schedule 24 FA 2007. Relying on Auxilium, CPR contended that a deliberate inaccuracy requires the taxpayer to know that the return contains an inaccuracy.

The FTT refused CPR permission to appeal in a decision released 31 January 2022. The FTT dealt with the ground of appeal relating to the deliberate inaccuracy penalty in paragraphs [11]-[12] of the decision refusing permission to appeal as follows:

Mr Bedenham submitted that the FTT erred in dismissing CPR’s appeal against the deliberate penalties because the FTT did not find that CPR had subjective knowledge that the VAT returns were inaccurate and, therefore, CPR’s appeal on that issue should have been allowed. He contended that anything short of actual knowledge (including recklessness) is not sufficient to support a finding of deliberate behaviour. He said that the FTT’s finding in [124] that CPR “cannot have reasonably concluded” that it had sufficient evidence of export was not a finding that CPR had subjective knowledge that its VAT returns contained an inaccuracy. That was made clear in the next sentence where the FTT found that CPR had been “at least reckless”. He also noted that, in refusing permission to appeal, the FTT did not suggest that the findings made in the decision satisfied the subjective knowledge test set down in Auxilium but stated that it was not binding on the FTT in this case and that the Supreme Court had “indicated that deliberate behaviour may encompass recklessness”. Mr Bedenham submitted that the FTT did not make any finding that CPR had actual knowledge of the inaccuracies in the returns or that it took a deliberate decision to “shut its eyes” or not to make further enquiries so as to avoid discovering the true position. CPR’s case was that there is no finding by the FTT in the Decision that CPR knew that it did not have the necessary proof of export or that CPR had any suspicion that it did not have the documents and deliberately choose not to enquire further.

Ms Robinson submitted that, properly analysed, the FTT’s findings of fact were findings that CPR had actual or, at the very least, blind-eye knowledge that the returns submitted contained inaccuracies. Accordingly, the FTT did not err in dismissing CPR’s appeal and confirming the deliberate penalties. She contended that the FTT’s finding in [124] that CPR cannot reasonably have concluded that it had sufficient evidence of export was, in effect, a finding that no reasonable taxpayer in CPR’s position (i.e. a reasonable taxpayer, possessing the knowledge and information that CPR had) could have reached such a conclusion. Ms Robinson relied in particular on the FTT’s reference in [124] to the ‘knowledge and intention’ referred to in Auxilium which she contended anchored the factual findings that followed. Those findings were that CPR knew that it was required to obtain evidence of export in order to zero-rate supplies and it knew the nature of the evidence that was required because it had been told repeatedly by HMRC and had been assessed twice previously for not having such evidence.

Ms Robinson maintained that there was evidence and the FTT made findings of fact that CPR was aware of the need to obtain evidence that the goods had actually left the UK. She contended that a finding that CPR knew of the requirement to obtain export evidence of a particular type in order to zero-rate supplies must inevitably lead to a conclusion that CPR knew it was not entitled to zero-rate supplies when it did not have such evidence.

Ms Robinson also submitted that if the FTT’s findings did not amount to a finding that CPR had actual knowledge of the inaccuracy then they amounted to a finding of ‘blind eye’ knowledge. She contended that, against the background of the earlier assessments and repeated information from HMRC as to the evidence required to zero-rate, the FTT’s finding that CPR “cannot reasonably have concluded that they had sufficient evidence of export when they zero-rated the supplies” was, if not a finding of actual knowledge, a finding that CPR made a deliberate and conscious decision not to confirm whether the evidence it did have was sufficient.

There was no dispute that CPR provided the VAT returns to HMRC. The FTT found that the VAT returns contained inaccuracies and, as a result, CPR’s liability to account for output tax was understated. That finding is not the subject of any appeal. There can be no doubt that CPR intended that HMRC should rely on the VAT returns as accurate documents (see the discussion in CF Booth at [45] – [47]). The key issue for the FTT to determine was whether, when it submitted the VAT returns, CPR had actual or blind eye knowledge that it did not hold evidence of export in relation to the relevant supplies and so was not entitled to treat them as zero rated in the returns. In this appeal, we must consider whether the facts found by the FTT in the Decision support a finding that there was a deliberate inaccuracy on the part of CPR (in the agreed sense of that term).

There is almost no discussion of the penalty provisions or of Auxilium in the Decision. In relation to the legislation, the FTT set out paragraphs 1 and 3 of Schedule 24 FA 2007 without comment. In relation to Auxilium, the FTT simply recorded the parties’ submissions (by CPR at [34] – [36] and for HMRC at [43] – [46]). At [124], the FTT made clear that it had considered the “knowledge and intention” referred to in Auxilium but did not expand on what that meant or how it applied to CPR. We conclude that the FTT was aware of the statement in [63] of Auxilium that the taxpayer must know that a document contained an inaccuracy at the time that the document is provided to HMRC and that this is a subjective test. We now consider whether and how the FTT applied that test to the facts that it found.

The FTT’s findings in relation to the penalties are in [124] of the Decision which is set out in [4] above. In short, the FTT made two findings: first, that “CPR cannot have reasonably concluded that they had sufficient evidence of export when they zero-rated the supplies”; and, secondly, that CPR’s behaviour was “deliberate as the returns had been submitted when CPR was at least reckless as to whether it had the required evidence to zero-rate.” In these passages, the FTT did not make any finding that CPR knew that its VAT returns contained any inaccuracies when it submitted them to HMRC.

The first of the two findings was based on the undisputed fact that HMRC had assessed CPR for VAT on exports for which it did not hold evidence of removal from the UK in 2008 and 2011 and, further, had provided CPR with VAT Notice 725, which set out the requirements for zero rating exports, on more than one occasion. The finding that CPR cannot have reasonably concluded that it had the necessary export evidence to support zero rating is a finding that CPR acted unreasonably in treating the relevant supplies as zero rated. A finding that there was a failure by CPR to take reasonable care would certainly justify a finding that the inaccuracy was due to carelessness on CPR’s part but, in our view, falls short of a finding that CPR had actual knowledge or blind eye knowledge of the lack of export evidence. The impression that the FTT concluded that CPR acted unreasonably but not knowingly is reinforced by the second finding that CPR was reckless about whether it had the evidence needed to zero rate the supplies. As already explained, we do not express any view on whether an inaccuracy that is attributable to recklessness is deliberate for the purposes of the penalty regime because we were not addressed on that point. We determine this appeal on the basis that the deliberate inaccuracy penalty appeal only applies in this case if CPR provided VAT returns to HMRC knowing that they contained errors. In our view, the conclusion that CPR was “at least reckless” is not a finding that CPR had actual or blind eye knowledge of any error in the VAT returns and, accordingly, did not support a finding that CPR was liable to a penalty for deliberate inaccuracy.

We have also considered the permission to appeal decision but it does not assist in understanding the facts or reasons for the FTT’s decision to uphold the penalties on the basis that the inaccuracies were deliberate on the part of CPR. Paragraph [11] and the first sentence of [12] refer to Auxilium but the (correct) statement that it is not binding give the impression that the FTT did not agree with the decision in Auxilium and did not follow it in reaching its decision. The second sentence of [12] does no more than restate [124] using the same term, “cannot reasonably have concluded”, without explaining how that constituted deliberate behaviour. The final sentence of [12] “notes” the Supreme Court’s comment about recklessness in Tooth but does not say whether the FTT had based its decision on a finding of recklessness. At no point in the decision refusing permission to appeal does the FTT say that it made a finding that CPR had knowledge of the inaccuracies. The way the decision was framed indeed supports CPR’s submission that the FTT found a want of proper care or recklessness and believed that these were sufficient to amount to knowledge.

In summary, we are not satisfied that the FTT correctly applied the test in Auxilium to the facts in this case and, in any event, we consider that the FTT’s findings of fact do not support a conclusion that the inaccuracies in CPR’s VAT returns were deliberate (applying the Auxilium test). We find that the making of the decision in relation to the penalties involved the making of an error on a point of law. It follows that CPR’s appeal against that part of the Decision that relates to the penalties must be allowed.

In the event that we allowed the appeal, Mr Bedenham invited us to re-make the decision and impose a careless penalty under paragraph 1 of Schedule 24 FA 2007. Ms Robinson suggested that we might remit the case if we found that the FTT had based its decision on recklessness. In our view, it would not be appropriate to remit in this case as we have the FTT’s findings of fact and are able to apply the penalty provisions to them without the unnecessary expense and delay of a further hearing before the FTT. There is no dispute that if, as we have found, CPR is not liable to a penalty for deliberate inaccuracy then it must, in the circumstances of this case, be liable to a penalty for failure to take reasonable care. Accordingly, we set that part of the Decision aside and re-make it as a decision allowing CPR’s appeal relating to the deliberate penalty but imposing a careless penalty in its place.

For the reasons given above, CPR’s appeal is allowed and we exercise our power under section 12(2)(a) of the Tribunals, Courts and Enforcement Act 2007 (‘TCEA’) to set aside the Decision in so far as it relates to the penalties. Exercising our power under section 12(2)(b)(ii) TCEA and paragraph 17(2)(b) of Schedule 24 FA 2007, we remake the Decision to allow CPR’s appeal against HMRC’s decision to assess CPR for penalties for deliberate inaccuracy and confirm that CPR is liable for penalties for careless inaccuracies.

We were not addressed on the quantum of the penalty and, indeed, the calculation should be straightforward. In the event that there is any difficulty in agreeing the amount of the revised penalty, the parties have liberty to apply within 28 days of the date of release of this decision for a decision on quantum on the papers or further directions.

Any application for costs in relation to this appeal must be made in writing and served on the Tribunal and the person against whom it is the order be made within one month after the date of release of this decision as required by rule 10(5)(a) and (6) of the Tribunal Procedure (Upper Tribunal) Rules 2008.