18639

VAT – Default interest – Assessment reduced on appeal – Interest reduced accordingly – Musashi [2004] STC 220 distinguished – VATA 1994 s.74

VAT – Repeated misdeclaration penalty – Requirement for penalty liability notice – VATA 1994 s.64

LONDON TRIBUNAL CENTRE

	RICHFORD DESIGNS LTD	Appellant

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	THEODORE WALLACE   (Chairman)
						 MRS SHAHWAR SADEQUE MPhil

Sitting in public in London on 29 and 30 April 2004

Mr Michael Bowen, director, for the Appellant  

Mr Sarabjit Singh, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

1.	This appeal concerned an assessment issued on 28 September 2000 for £10,189, the interest assessed on the tax assessed in the September 2000 assessment and two other assessments, two misdeclaration penalties and two default surcharges.

2.	Miss Lindsay Godwin, Customs officer, gave evidence.  The Appellant addressed us; there was no factual dispute as to what he said relevant to the appeal and since Mr Singh did not wish to cross-examine we treated the relevant factual part of what the Appellant said as evidence.  There was a substantial bundle to which both parties added during the hearing.

3.	The brief facts are as follows.

4.	The Appellant produces furniture including built-in kitchens from Portsmouth.

5.	Following control visits in 1997 and 1998, on 10 September 1998 the Appellant was notified of an assessment for £26,200 for periods 10/95 to 04/98 together with interest of £2,614.85 calculated to 7 September 1998.  The assessment itself is not challenged.

6.	A misdeclaration penalty of £898 was imposed on 22 September 1998 under section 63 of the VAT Act 1994 for period 01/97; this was reduced to £673 on 10 December 1998 when 25% mitigation was allowed..

7.	Assessments of further interest were made approximately at monthly intervals on the outstanding VAT assessed.

8.	The Appellant paid off £1000 a month to April 1999, £1,200 a month to January 2000 and larger amounts thereafter.

9.	On 28 September 2000 an assessment of £10,189 for periods 01/98 to 04/00 was notified with interest of £984.97.

10.	On 10 October 2000 a misdeclaration penalty under section 63 of the VAT Act 1994 of £616 for 07/99 was notified.

11.	Default surcharges of £657.36 for 07/01 and £1,166.93 to 01/02 were also notified.

12.	We consider the assessment, the surcharges, the misdeclaration penalties and the interest in turn.

The Assessment

13.	The assessments notified on 28 September 2000 followed a visit by Miss Godwin.  They contained a number of different components.  £673 represented differences in both directions in outputs and inputs in the Appellant’s records from the returns; the figure was a net amount underdeclared.  £1,680 was in respect of consultancy work on which output tax had not been charged.  £2,651 was on input tax wrongly claimed on purchases from France.  £244 was for input tax claimed when no invoice was held.  Mr Bowen did not challenge any of those components at the hearing and we accepted Miss Godwin’s evidence.

14.	The remainder was £4,941 in respect of kitchens supplied which the Appellant had zero-rated.  £1,113 of this was in respect of £7,473 invoiced to Stylus Building Services Ltd to design and supply kitchen units for two cottages at Denmead.  The invoice stated that it was for two plots at Denmead.  Miss Godwin said that the Appellant provided no evidence that these were for properties being built.  However she did not record a request for evidence in her visit report and did not write a letter requesting evidence. 
 
15.	On the second day of the hearing Mr Bowen produced the quotation and plans which clearly were for a new development, a fact which Miss Godwin accepted.  However part of the quotation was for ovens, gas hobs and fridge/freezers which are excluded from zero-rating under Note 22(c) to Schedule 8, Group 5 of the VAT Act 1994.  £2,282 of the invoice related to these of which VAT at 7/47ths was £340.  The result was that the assessment for period 07/99 fell to be reduced by £773, rather than by £1,113.

16.	The Appellant queried £1,117 disallowed for zero-rating which was in respect of a specialist kitchen in accordance with the needs of an autistic child. The supply appears to have been to a charity sponsored by Hampshire County Council under the “JENI” budget. The Appellant did not produce an exemption certificate to Miss Godwin.

17.	We considered whether this might fall within Schedule 8, Group 12 but concluded that it did not come within any item under the Group. The work did not involve the construction of ramps or widening doorways or passages within item 9 nor did it involve a bathroom, washroom or lavatory within item 11. We conclude that the work in question is not zero-rated.  

18.	Apart from the reduction of £773 for period 07/99 the assessment of 28 September 2000 therefore stands; that for 07/99 falls to be reduced from £4,112 to £3,339.

The surcharges

19.	The two default surcharges were for late returns for periods 07/01 and 01/02.  Mr Bowen said that the 07/01 return was a few days late because he wanted to be sure that the cheque would be paid by the bank.  An insufficiency of funds to pay VAT due is excluded from being a reasonable excuse by section 71(1)(a).  The Appellant was unable to point to any underlying cause for the shortage of funds which might have given rise to a reasonable excuse.

20.	He said that the other default occurred when he was suffering from Bells Palsy.  We sympathise over what was clearly an unpleasant condition, however he did not refer to illness in any letters to Customs at the time.  A note from his doctor confirms that the Appellant had two episodes, in January 1998 and October 2001.  The doctor wrote, “Bells Palsy is thought to be due to inflammation in the nerve possibly viral.  It would be difficult to say stress caused it though I suppose it could be a factor”.  The dates came between the defaults.  The Appellant has not satisfied us that there was a reasonable excuse for that default.  We note that he did not make any alternative arrangements to get the return for 01/02 in.

The misdeclaration penalties

21.	Both of these penalties were imposed under section 63.  Section 63(1) provides for a penalty of 15 per cent if the VAT which would have been lost if an underdeclaration had not been discovered exceeds 30 per cent of the relevant amount for that period. The “relevant amount” is the gross amount of the VAT, see subsection (4), and the “gross amount” is the aggregate of the input tax and the output tax which should have been stated on the return, see subsection (5).

22.	At the conclusion of the oral hearing the Tribunal directed the Commissioners to notify the Tribunal within 14 days of the position regarding the misdeclaration penalty for 07/99 in the light of the reduction in the assessment for that period and in the light of the actual returns, copies of those not having been included in the bundle.

23.	In a letter dated 12 May 2004, Mr Doherty, senior officer, Appeals and Reconsiderations, maintained that the penalties stood and produced schedules for periods 01/97 and 07/99.  For period 01/97 the input tax declared was shown as £11,165.04 from which £4,710 overclaimed input tax was deducted to give gross adjusted input tax of £6,455.04. £7,835.06 declared output tax plus £1,281 underdeclared output tax gave £9,116.06 gross adjusted output tax. The relevant amount within section 63(2) and (4) was therefore £15,571.10.  The tax which would have been lost was £5,991. This exceeded 30 per cent of £15,571.10.  The Appellant was therefore liable to a misdeclaration penalty under section 63 for 01/97.

24.	Mr Doherty’s calculation for period 07/99 showed £11,165.04 input tax declared and £376 overdeclared input tax less £122 underdeclared input tax, giving gross adjusted input tax of £11,005.91.  Output tax declared was £13,321.81 to which £3,858 assessed output tax was added, giving a “relevant amount” or penalty base of £28,185 rounded down.  Thus however included the £773 by which the tax is to be reduced.  The correct figure for the relevant amount is £27,412.72.

25.	Mr Doherty then compared the actual assessment with 10 per cent of the relevant amount on the footing that the repeated misdeclaration penalty applied.

26.	This was misconceived.  The penalty was imposed under section 63 and not under section 64.  The penalty notification referred in terms to section 63.  There was  no evidence that the penalty liability notice required under section 64(2)(b) for a repeated misdeclaration penalty was served.  Since the material inaccuracy in respect of period 01/97 was not itself the subject of an assessment until 5 September 1998, it would have been surprising if the penalty liability notice had been served within the 5 accounting periods required under section 64(2)(c).  We find as a fact that it was not so served.  The result is that no liability to a penalty under section 64 arose.

27.	This conclusion accords with paragraph 10 of the Commissioners’ Statement of Case which referred to section 63.

28.	Once the tax which would have been lost if the inaccuracy had not been discovered is compared with 30 per cent of the penalty base or “relevant amount” it is clear that the circumstances set out in section 63(2) were not satisfied and there was no liability to a penalty under section 63 even before the £773 is deducted from the tax which would have been lost.

29.	The figures showing how the liability to the misdeclaration penalties arose were not in the material produced for the hearing.  In our opinion if the calculation of the “circumstances” within section 63(2) and 64(1)(b) are not shown in the penalty notification, they should be shown in an accompanying letter.

30.	We return now to period 01/97.  Mr Bowen said that the returns were based on computer records and that there should be tolerance for genuine mistakes.  This goes to whether there was a reasonable excuse or whether the penalty should be mitigated.

31.	Mr Bowen did not elaborate further on either aspect.  The visit reports by Mr Atkins said that there appeared to be duplication of input tax claims since the trader had originally claimed on both a payment basis and an invoice basis; the VAT summary reports showed significantly different figures from the computer accounts.  Mr Bowen said that the inputting to the computer was carried out to the best of his ability and understanding on how the programme worked.

32.	Mr Bowen has not satisfied us that there was a reasonable excuse for the misdeclaration for 01/97.  Nor has he shown adequate reasons for mitigation.

Default Interest

33.	We turn finally to default interest.  Under section 74 of the VAT Act 1994 when an assessment of tax is made for a period for which a return has been made it carries interest from the date by which the return was due up to the date of payment.  It cannot be carried back more than three years.  Penalties and default surcharges do not carry interest; nor does unpaid interest carry interest.

34.	Unfortunately the notices of assessment to interest do not state the amount of unpaid tax on which the interest is assessed.  This makes it impossible to check whether the calculation is correct without further material.  Mr Doherty produced several pages of computer prints on the second day.  Having examined these it is clear that the interest notified with the original assessment (see paragraph 5 above) did not go back beyond three years, did not charge interest on interest and did apply the correct rates of interest. Mr Bowen did not point out any errors on the later interest calculations and none are apparent to us.

35.	An adjustment is however due for the interest attributable to the £773 by which the 07/99 assessment has been reduced.  The rate of interest was 7.5 per cent to 5 February 2000 and varied from 8.5 per cent up to 5 May 2001 down to 5.5 per cent last autumn.

36.	Mr Singh submitted that in spite of the fact that the assessment for 07/99 has now been reduced, the original assessment carries interest until the date when it was reduced. This surprising proposition was based on the decision of the Court of Appeal in Customs and Excise Commissioners v Musashi Autoparts Europe Ltd [2004] STC 220, which concerned zero-rating for exports.  In that case the taxpayer did not have the necessary evidence to meet the conditions for zero-rating exports at the time when the assessment was made. The assessment was therefore validly made. On obtaining the evidence the taxpayer was entitled to adjust his VAT account for the later period in which the conditions were made. In those circumstances the assessment carried interest up to the adjustment in the later period. Mr Singh submitted that the assessment in the present case was validly made being to best judgment and the same principle applied because the evidence to justify zero-rating was not produced until the hearing.

37.	If this proposition was correct it would seem to apply to any assessment which was made to best judgment but was reduced or set aside by the Tribunal on the evidence before it or indeed was subsequently varied by the Commissioners.  It seemed to the Tribunal that this would be difficult to reconcile with the principle of proportionality under Community Law or the Human Rights Convention.  We asked for confirmation that the Commissioners maintained that interest was due on the £773.  Following the hearing the Tribunal was notified that “the Commissioners do not wish to seek interest on the £773 part of the assessment that has now been withdrawn.”   This was a somewhat opaque response.

38.	We have no hesitation in holding that interest was not due on the £773.  The decision in Musashi turned on the requirement in section 30(8)(b) that conditions specified by the Commissioners in regulations for zero-rating exports to other Member States be met.  The conditions required valid commercial documentary evidence that the goods had been removed. There is no equivalent condition for zero-rating a supply in the course of construction as in the present case.  The decision in Musashi does not in any way affect the general principle that if an assessment is reduced or withdrawn the interest based on the assessment must be adjusted accordingly. The interest stands or falls with the assessment. The law is correctly set out at paragraph 2.9 of Notice 700/43 which reads as follows,

“If, as a result of the reconsideration or appeal the original assessment is reduced or withdrawn, the amount of interest charged to you will be recalculated and similarly reduced or withdrawn, as appropriate.”

Conclusion

39.	The appeal against the assessment for 07/99 succeeds in part, the assessment being reduced by £773.  The appeals against the default surcharges are dismissed.  The appeal against the misdeclaration penalty for 01/97 is dismissed but the appeal against the penalty of £616 for 07/99 is allowed.  The assessments to default interest fall to be reduced by excluding interest assessed on £773 from 1 September 1999.  We estimate this to be approximately £260: the exact amount will depend on the date to which the interest has been assessed.

THEODORE WALLACE
CHAIRMAN

RELEASED: 08/06/2004

LON/02/1057