19330

NOTICE OF DEMAND – Information – Documents – Whether Commissioners’ specification reasonable – Yes

PENALTY – Reasonable excuse – Non-compliance with notice of demand- Whether doubts as to validity of notice a reasonable excuse – No – Whether legal advice as to validity of notice a reasonable excuse – No 

LONDON TRIBUNAL CENTRE

	LLOYDS TSB GROUP PLC	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	STEPHEN OLIVER QC  (Chairman)
						GEORGE MILES
					 	SANDI O’NEILL

Sitting in public in London on 3 and 4 October 2005

Michael Conlon QC and Sadiya Choudhury, counsel, for the Appellant 

Melanie Hall QC, instructed by the acting general counsel and solicitor to the Commissioners for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2005

DECISION

1.	Lloyds TSB Group (“the Bank”) appeals against two decisions of the Respondents (“the Customs”).  The first, contained in a letter of 9 October 2003, concerns the issue of a notice to produce documents (“the Notice of Demand”).  The second, contained in a letter of 27 November 2003 (“the Penalty Letter”) notifies the Bank that its failure to comply has made it liable to a penalty of £5 a day up to a maximum of 100 days on which the failure continues.

The Notice of Demand
2.	Paragraph 7(2) of Schedule 11 of the VAT Act 1994 provides:
“Every person who is concerned (in whatever capacity) in the supply of goods or services in the course or furtherance of a business or to whom such a supply is made, … shall –

(a)	furnish to the Commissioners, within such time and in such form as they may reasonably require, such information relating to the goods or services or to the supply, … as the Commissioners may reasonably specify; and
(b)	upon demand made by an authorized person, produce or caused to be produced for inspection by that person –

(i)	at the principal place of business of the person upon whom the demand is made or at such other place as the authorized person may reasonably require, and
(ii)	at such time as the authorized person may reasonably require, 

any documents relating to the goods or services …”.

Paragraph 7(4) provides, so far as is relevant to this appeal:
“For the purposes of this paragraph, the documents relating to the supply of goods or services … shall be taken to include any profit and loss account and balance sheet relating to the business in the course of which the goods or services are supplied …”

3.	The Notice of Demand was addressed to Mr David Guest, Senior Group VAT Manager at the Bank.  (Mr Guest gave evidence at the present hearing.)  The Notice demands that at 25 Gresham Street London at 10.30am on 12 November 2003 –

“You produce or cause to be produced for inspection 

•	the originals or copies of  the management accounts, or equivalent, for Lloyds TSB Group Plc for the period 1 January 2002 to 31 December 2002, 

•	the originals or copies used to prepare the management accounts for the period 1 January 2002 to 31 December 2002 and which relate to the manner and the extent to which costs and income are allocated internally both to LTSB core bank and to the different business streams within it.

The purpose of this notice

The purpose of this Notice is to obtain the necessary information to enable the Commissioners to determine whether your current partial exemption special method produces a fair and reasonable attribution of input tax in the context of your current business structure.”

Background and chronology
4.	The Bank makes both taxable and exempt supplies and operates a special method for partial exemption. The group registration embraces the activities of various corporate entities, one of which is LTSB Private Banking Ltd (“Private Banking”).  

5.	The Bank’s taxable supplies for which recovery of input tax is available have included corporate finance and asset management services.  These fall within what are referred to as the “service” category of the Bank’s  activities.  The Bank’s exempt activities for which no recovery of input tax on costs is available are its lending to customers.  Both the services and the lending categories of supplies fall within what is sometimes referred to as the Bank’s “core” banking activities.  The partial exemption special method, sometimes known as the core bank method, exists for the purpose of enabling the apportionment of residual input tax by reference to taxable and exempt outputs in each category.  The partial exemption special method had, we were told, evolved over many years.

6.	As from 1 January 1996 Private Banking was first included in the core bank method. An agreement was reached with the Customs on 22 February 1999 resulting in a revision to the Bank’s partial exemption special method with effect from 1 January 1999. This was to have a minimum of two years applicability. The agreement covered the inclusion of Private Banking in the core bank method.  

7.	A letter from the Customs to the Bank of 7 January 2002 sought to “open discussion on the continued use of the current service/lending method”. Aspects of the method, the letter noted, appeared to be “out of step with some of your competitors” and there was a need to review whether the result of the special method was still “fair and reasonable”.  The core bank activities comprised in the method were seen by the Commissioners to encompass different companies operating in a variety of different markets. Those activities included the activities of the Bank’s branch bank network, but it appeared to the Customs that the larger part of Private Banking’s activities were not performed by the branch network. The letter expressed the concern of the Customs about Private Banking activities being included within “Annex 1”, i.e. the core bank method.  The letter reads, so far as is relevant, as follows:

“In all our discussions about this matter, your main justification for this sector’s inclusion within Annex 1, has been that some of its activities are similar or identical to activities carried out by the LTS Branch banking network.  To some extent this is true but equally the larger parts of the private bank’s activities are not performed by the branch network. …  The inclusion of the private bank’s taxable income within the “core bank” calculation improves (distorts) the “service” recovery rate to an extent that far exceeds the rate justified by the sector’s usage of input tax in making its taxable supplies. Again there seems little practical difficulty within the SAP accounting system segregating input tax incurred in the private bank operation and apportioning this input tax via a separate annex to the group’s partial exemption method.”

8.	The Bank responded on 13 February making the point that there was a substantial degree of integration of its Private Banking system and customer relations into the main branch network. Mr Guest emphasized that point when giving oral evidence.

9.	The Customs produced calculations (in a letter of 9 September 2002) purporting to show the distorted effect of including Private Banking in the special method. This letter noted that the private banking activities did not appear to produce lending income for the Bank; thus the inclusion of Private Banking in a method based on service/lending was inappropriate.  

10.	 A meeting was held on 27 November 2002. The Bank was represented by Mr Guest. Discussions focused on the fairness and reasonableness of the service/lending method and the recovery rate achieved by the core bank activities under the partial exemption special method as then used. It was agreed that the Customs would put written proposals to the Bank, and on 7 January 2003 Customs wrote suggesting that asset management activities of Private Banking be put into a separate sector and seeking a response within 14 days.

11.	Letters were exchanged without any significant advance. The Bank questioned whether anything had changed since the 1999 agreement and whether the Customs had any evidence to support their case that their proposed method would produce a fair and reasonable result. The Bank pointed out in a letter of 17 January 2003 that certain group costs, such as human resources, group finance and group risk management, supported Private Banking activities. It was pointed out for the Bank that the then current method produced a fair and reasonable attribution and that, it was said, had been the reason why Customs had supported the use of that method in the past. On 27 January Customs wrote suggesting that information on cost allocation could be obtained from “management accounts”. To that the Bank replied on 6 February that it was not obliged to prove that the then current method was not fair and reasonable; it was for the Customs to prove that it was unreasonable.  

12.	The Customs wrote on 6 March 2003 requesting the Bank’s annual accounts for 2001 and “your most recent management accounts for the retail banking sector including those for private banking and the Treasury”. The letter asked for information as to the allocation of branch banking costs, what profits or losses Private Banking had made in recent years and how the profitability or otherwise of Private Banking was determined. In evidence Mr Guest recognized that, at that time, Customs did not have material that enabled them to check the costs attributable to the Private Banking activities. He nonetheless stood firm by his assertion that the Customs were not entitled to the Bank’s management accounts but accepted that he had not by then seen any management accounts.

13.	The Customs wrote back on 9 April 2003 quoting Schedule 11 paragraph 7(2)(a), set out above, and requiring the information within 10 days. The application of that provision was disputed by the Bank in a letter of 17 April. The Bank’s letter, signed by Mr Guest, went on:

“I wish to put on record that I do not accept that the legislation you invoke empowers your department to examine management accounts. It is my general experience that the Bank’s management accounts, if considered in isolation, do not show the information we require, and are pitched at such a level, that there is no useful detail to be garnered in respect of the study we are pursuing.  I am therefore seeking alternative sources of data for our purposes, with a view to meeting the study timescales.”

The basis of Mr Guest’s “general experience”, he said, had been his experience as a VAT officer who had “never found management accounts useful”. By then Mr Guest had had a discussion about the request for management accounts with Mr Stephen Morton, Chief Manager responsible for group financial management information. Mr Morton also gave evidence.

14.	On 7 May 2003 Customs wrote stating their view that the partial exemption special method was no longer fair and reasonable. They set a deadline for the Bank’s research as the end of June 2003. The Bank wrote back on 16 May refuting the possibility of identifying costs allocation under the current standard method and stating, once again, that the management accounts did not deal with the supply of goods and services and did not contain either a balance sheet or a profit and loss account.  

15.	The 30 June 2003 deadline arrived without any further exchange. Then on 4 July Customs wrote pointing out that the application of their then current method appeared to show that half of all supplies bearing residual input tax were borne by the Private Banking; they could not accept that bearing in mind that there was only one dedicated branch applicable to Private Banking.  The letter went on to say:

“In order to determine the appropriateness of the current method, the Commissioners wish to know how Private Banking costs ascribed by the method compare to actual costs allocated to it within the Lloyds TSB Group.  The Commissioners believe that Lloyds TSB will have systems for allocating costs across its business areas and that there will be robust indications of the costs attributed to Private Banking in the Group’s management reports. The Commissioners are seeking your assistance in understanding your cost allocation systems and as previously stated our operational accountants and specialists computer analysts are available to assist in this process.  In order to allow the Commissioners to best judge the appropriateness of the method it has been necessary for us to request information on the costs and profitability of the core bank’s operational areas, including Private Banking. This is basic, fundamental information for businesses such as yourselves which experience tells us is likely to be readily accessible.”

16.	On 22 July 2003 a further meeting took place. This was followed by a letter from the Bank of 25 July making the point that the management accounts contained “price sensitive information” and that it was not the Bank’s policy “to make them available to outside bodies”. The letter went on to refer to the Customs’ internal Manual, Chapter 2 Part 24B which contained the following statement:

“Management accounts, consolidation papers to group accounts, the auditors’ management report and accountant’s working papers will relate, at least in part, to the trading activity of the business. They may also contain non-financial or confidential information. You may request to see the documents in full, but the trader is only legally obliged to produce those parts which relate to the supply of goods or services”.

In evidence Mr Guest accepted that the Customs were bound by confidentiality and that it was reasonable to assume that sensitive information would not be disclosed by them. The possibility of a breach of confidence on the part of the Customs in relation to the documents and information referred to in the Notice of Demand can in our view be ruled out in determining the reasonableness of the requirement.

17.	The Customs wrote back on 8 August 2003 requesting “details outside of management accounts”. On 8 September the Customs wrote refusing the inclusion of new companies in the VAT group because the partial exemption is “currently suspended”.  On 12 September Customs wrote making two points:

“A formal Notice to Produce can only relate to documents that exist and your management accounts are the only documents of which I am aware that will contain the information required to determine how costs are used in the business. If the information is held in alternative documents, or you are willing to provide the equivalent information in an alternative format, the Commissioners are prepared to accept these instead. As previously noted, I am also willing for one of our operational accountants to assist you in gathering the required data.”

“… the current method implies that the Private Bank makes losses several times greater than its current turnover. Despite requests, I have been provided with no evidence to suggest that this is in fact the case which leaves me to believe that it is more likely that the method is at fault.”

18.	On 9 October 2003 the Commissioners wrote enclosing the Notice of Demand to take effect on 12 November. The Bank responded on 3 November enclosing a profit and loss account and a balance sheet but refusing further disclosure saying that the management accounts were not “legally disclosable” nor were the documents. In any event, the letter claimed, the demand for the documents was too vague and unspecific.  

19.	Mr Guest accepted in evidence that the management accounts existed and the documents that had been used to prepare them also existed. But he said that they would be unlikely to provide the sort of information that related to the manner and extent of the allocation of expenses. Questioned why he had not asked Mr Morton about the supporting documents, he said – “We were advised that they were not produceable anyway”; so he had not investigated them further. The three or so occasions on which he had consulted Mr Morton had, he said, been to reinforce the case that there was no legal obligation to provide the documents.  

20.	On 12 November 2003 and again on 12 December the Customs called on the Bank to collect the documents. The Bank refused to produce them, on legal advice, but gave copies of the Report and Accounts for the year ending 31 January 2002 and half year  to 30 June 2003.

21.	Finally on the correspondence we mention a letter from the Customs dated 17 February 2004.  This made two points:

“Approximately half of the income of the current core bank sector that results in the recovery of input tax derives from Private Banking. Whether or not Private Banking should be included within the core bank sector is therefore an extremely significant point.  For that income to be appropriate to that sector, the inclusion of those values must fairly reflect use of the input tax bearing costs in making supplies that carry the right to deduct.

However, the current method imputes that Private Banking incurs expenses that exceed its income and that it makes a substantial loss.  The size of the loss does not seem realistic and is not explainable by the activities of Private Banking. This therefore implies that the costs are not used in the proportion suggested by the current special partial exemption method and hence that method does not reflect the use of the input tax bearing costs.  In the absence of any evidence to the contrary, the Commissioners have therefore concluded that the current method is not fair and reasonable.”

Those points were put to Mr Guest who in substance did not dispute the conclusions reached by the Customs. His qualification was that the statement that 50% of  the input tax recovery was attributable to Private Banking did not reflect the additional VAT that would be recoverable were Private Banking to be segregated from the core activities.  

The Monthly Management Reports 
22.	The Bank’s Monthly Management Reports (“MMRs”) most closely answer the term “management accounts”. Mr Stephen Morton produced the MMR for December 2002. This covers the activities of the consolidated group and was prepared for submission to the Board. The MMR includes a management profit and loss account and divisional profit and loss accounts. The December 2002 MMR ran to 36 pages and covered topics such as performance of the different divisions of the group compared to expectations and explanations of possible reasons for these variances.  Confidential and price-sensitive information contained in a copy shown to us had been blacked out.  

23.	The information is broken down so that the five different elements of the business can be measured. One such element is “retail banking” and this includes a large part of Private Banking.  

24.	Stephen Morton accepted that the MMR and the accompanying commentaries gave more insight into the group business than the statutory accounts; the statutory profit and loss account and balance sheet would not, he accepted, have been enough to enable a relevant cost attribution to be made. He accepted that the costs relating to certain areas of Private Banking, such as advertising cost could be identified; he accepted also that it would be possible to deduce the contribution of Private Banking to the amount shown (in a page headed “News Release”) to the figure for UK retail banking and mortgages. The source of the information appearing in the MMR figures for the Wealth Management section (which included Private Banking) was electronic data; that information, Mr Morton said, had covered the allocation of costs “at Wealth Management level”.

25.	Our attention was drawn to the “Segmented Analysis” in the MMR where Direct Costs are allocated to various activities carried out by the group. One heading entitled “Other” covered the high street bank network as well as Wealth Management; and included within Wealth Management, Mr Morton said, was Private Banking.  He accepted that there was some electronic information that showed the direct costs of Private Banking and this was fed into the direct costs for the Wealth Management activity.  

Further points 
26.	Stephen Morton was shown the Customs’ letter of 6 March 2003 requesting the most recent management accounts and certain additional information. He said that he had not seen it and had not discussed its contents with Mr Guest. Nor, he said, had he and Mr Guest discussed possible alternative sources of data that might be provided, as volunteered by Mr Guest in the Bank’s letter of 17 April 2003.  

27.	Regarding partial exemption special methods generally, Mr Guest accepted that they were not static; they needed to be reviewed regularly to meet changes. He admitted to having been frustrated by the attitude of the Customs whose approach had been to depart from the method agreed in 1999 with, as he saw it, the object of reducing the Bank’s recoverable input tax.  

Conclusions on the Notice of Demand issue
28.	The threshold question is whether in issuing the Notice of Demand the Commissioners have, as the Bank argue, exceeded the powers given them by Schedule 11 paragraph 7.  

29.	The Notice of Demand requires the production of management accounts for 2002 (or equivalent) and of documents used to prepare the management accounts “which relate to the manner and the extent to which costs and income are allocated internally both to LTSB core bank and to the different business streams within it.”  In the terms of paragraph 7(2)(a), is the information in “such form as” the Customs “may reasonably require”; and is the information demanded “information relating to goods or services or the supply” of “goods or services as the Commissioners may reasonably specify”? In terms of paragraph 7(2)(b), are the documents requested “documents relating to the goods or services or to the supply” of goods or services?

30.	The Bank challenged the Notice of Demand emphazising at the outset the observation of Browne-Wilkinson VC in EMI Records Ltd v Spillane [1986] STC 374 at 379j. The approach to the words now found in paragraph 7(2) of Schedule 11 is this:

“The Court looks jealousy at such legislation and, if there is any ambiguity in the legislation, such ambiguity must be resolved in favour of existing legal rights, and particularly in favour of an individual’s freedom of personal or privacy.”

In the light of the evidence given at the present hearing, it was argued for the Bank, the MMR is not within paragraph 7(2). The MMR was not used for the purposes of the VAT returns or for the purposes of calculations under the then special method; indeed Mr Guest had admitted to not finding the MMR particularly useful for purposes of the special method calculations.  None of the business areas in the MMR, including the category “Other” in the Segmented Analysis (see paragraph 25 above) correspond to Private Banking; nor did the MMR show the allocation of costs to the basic business units such as Wealth Management, let alone to Private Banking.  Thus, while the MMR might admittedly provide a “better understanding” of the Bank’s business, it does not relate to a supply of goods or services.

31.	The documents referred to in the second limb of the Notice of Demand are, it was argued for the Bank, outside the scope of Schedule 11 paragraph 7(2). There were no documents used to prepare the MMR, only electronic data; this data is not used to allocate costs to Private Banking and not all of those costs (which includes salaries) bear VAT anyway. Moreover the SAP computerized accounting system does not provide any mechanism for allocating costs.  

32.	It seems to us that in specifying “the management accounts or equivalent” the Commissioners were “reasonably” specifying information relating to the supply of the Bank’s services. In the first place we are satisfied that the MMRs are fairly within the scope of the expression “management accounts or equivalent”. Do they relate to the supply of the Bank’s services? It seems to us that they do. The Bank carries on business as a retail bank and as such makes supplies of  services. The MMRs, as Stephen Morton explained, cover and analyse elements such as sales, cashflow and profit forecasts and they show the total amounts paid out in costs. “Sales” are supplies and costs may carry recoverable input tax. The MMRs may or may not, when actually inspected, provide information that enables the Commissioners to determine whether the Bank’s partial exemption special method produces a fair and reasonable attribution of input tax. But, in the ordinary and unstrained meaning of the word, they and the information contained in them “relate” to the Bank’s supplies. There is no ambiguity in the expression “relate to”. Instead, it is an expression that has to be applied to the particular circumstances. Nor, as we read the words “relate to”, do they limit the category of information or documents to those, such as invoices, that are directly connected with the making of actual supplies.

33.	Is this specification by the Customs of the management accounts or equivalent “reasonable”? We think so. The operation of the partial exemption regime is under the care and management of the Customs. It is the Customs’ function to ensure that the partial exemption special method of the taxable person in question  produces a fair and reasonable attribution of input tax to taxable, exempt and other supplies. The partial exemption special method must secure that the services acquired by the taxable person have “a direct and immediate link” in the relevant sense “with a clearly defined part of his economic activities, so that the costs of those services form part of the overheads of that part of the business, and all the transactions relating to that part are subject to VAT”. Those words are extracted from paragraph 40 of the Court’s decision in the reference of Abbey National Plc v Customs and Excise Commissioners [2001] STC 297 at 314.  Here the Commissioners see as critical the question whether the Private Banking sector is part of the core bank for purposes of the method or whether the Private Banking sector should be treated as a separate and clearly defined business area for the purposes of making an attribution of input tax. Whether on the final analysis that is a correct approach is beside the point. The point is that the Commissioners are reasonably specifying information that relates to supplies of services by the Bank and they have fully stated their case for doing so in the correspondence summarized in paragraphs 7-21 above. What is more, Mr Guest accepted that the partial exemption method was subject to regular review; it was three years since the last review and the Customs had made him aware of their concerns. Moreover the Customs had offered assistance to the Bank for the purpose of obtaining the information.  Those features reinforce the reasonableness of the request.

34.	Turning now to the second limb of the Notice, we recognize that the word “documents” has been used. The Commissioners were aware that the Bank stores information electronically and they must have known that stored information can be provided in documentary form. It would, we think, be ludicrous to interpret the letter as confining the request to such hard copy as the Bank had in its position or chose to print out but exclude the relevant information stored by the Bank in electronic form.

35.	Are the “documents” demanded “any documents relating to the goods or services or to (their) supply”? The use of the words “any documents” indicate to us that the power to issue Notices of Demand is not limited to particular types or categories of documents.  If (as we have concluded) the contents of the MMR relates to the supply of the Bank’s services, it must follow that the documents used to prepare them do so too.  So, have the Customs acted reasonably in demanding them? The Bank contends that the description of documents in the second limb of the Notice of Demand relates to a vast amount of information which may or may not relate to the Bank’s supply of goods or services; the requirement is, they say, vague and unspecific.

36.	We do not consider that the requirement was either vague or unspecific. The words of the second limb of the Notice of Demand, i.e. “the original or copies of any documents used to prepare the management accounts for the period … and which relate to the manner and the extent to which costs and income are allocated internally LTSB core bank and to the different business streams within it” are sufficiently specific. Moreover Mr Morton actually told us in evidence that information used to prepare the MMR, being information that identified the contribution of Wealth management and Private Banking to profit and loss, was in electronic form; he went on to accept that this electronic data related to the manner in which costs were allocated to Wealth Management. For those reasons we are satisfied that the Notice of Demand was validly issued.

The Penalty Letter
37.	The Penalty Letter noted that the Bank had failed to comply with the Notice of Demand.  So far as is relevant it reads:

“It has been brought to my attention that you failed to comply with a Notice of Demand, issued in pursuance of … Schedule 11 paragraph 7. 

The Notice, a copy of which is enclosed, required you to produce the records specified therein on 12 November 2003 at 25 Gresham Street.  Your failure to comply has rendered you liable to a penalty of £5 for each day up to a maximum of £100 days on which the failure continues.”

38.	Section 69 of VAT Act 1994 provides:
“(1)	If any person fails to comply with a regulatory requirement, that is to say, a requirement imposed under … (iii) paragraph … 7 of Schedule 11 … he shall be liable, subject to subsections (8) and (9) … to a penalty equal to the prescribed rate multiplied by the number of days on which the failure continues (up to a maximum of 100), or if it is greater, to a penalty of £50.

(8)	A failure by any person to comply with any regulatory requirement … shall not give rise to a liability to a penalty under this section if the person concern satisfies the Commissioners or, on appeal, a tribunal that there is a reasonable excuse for the failure … .”

39.	The Bank’s contention is that it has a reasonable excuse. The interpretation of the Notice of Demand is not, they say, clear cut. There was a genuine dispute about the scope of the partial exemption special method. The Customs and Excise Manual (see paragraph 16 above) and the VAT Notice actually stated that management accounts fall outside paragraph 7(4). Mr Guest had experience as a VAT officer and had always considered that a taxpayer might volunteer management accounts but could not be compelled to provide them. It was the Bank’s policy to keep the MMR confidential and the apparent safeguards in Finance Act 1989 section 182 (covering the exercise of confidentiality by the Customs) were, the Bank suggested, inadequate.  Moreover Mr Guest, having consulted Mr Morton, had reasonably concluded that the MMR contained nothing that specifically related to goods and services or indeed to the allocation of costs to Private Banking. Further, neither the MMR nor the electronically recorded information used to prepare the MMR, specifically allocated internal costs to Private Banking since it was not necessary to do so either commercially or for VAT purposes. Thus, it was argued, the Bank reasonably took the view that production of the MMR would not in fact assist the Customs in their enquiries. Finally it was pointed out that the Bank had sought and obtained legal advice to the effect that the MMR was outside paragraph 7(2) of  Schedule 11.

40.	All the points made in the last paragraph, the Bank argue, are capable of amounting to reasonable excuses and, in the present case, do so.

41.	In our view none of the points taken by the Bank amounts to a reasonable excuse. They are all variations on the same theme. That theme is that the Notice of Demand was, for one reason or another, itself outside the scope of paragraph 7(2) of Schedule 11. If a taxable person proposes to challenge a Notice of Demand the Act gives him the means of doing so. The fact that he may think that the Notice of Demand does not apply to him or that it places unreasonable demands on him or that the Commissioners are acting unreasonably are relevant in determining the validity of the demand. They do not, however, furnish the taxable person who, as the Bank have done here, chooses to ignore the demand with a reasonable excuse.  

42.	A reasonable excuse might be present, in the circumstances of a Notice of Demand served on a bank, where for some unforeseen or inescapable reason that bank had been unable to comply with the Notice of Demand. An example might have been a failure of that bank’s computer system storing the electronic data required to satisfy the Notice of Demand. Nothing of that sort happened here. The fact that the Bank took legal advice as to whether the MMR was within the scope of Schedule 11 paragraph 7(2) is also beside the point.  If the advice was that the Notice of Demand was invalid to the extent required production of the MMR, that point could have been followed up by a challenge by the statutory means, i.e. before the Tribunal. And that is exactly what the Bank has done.

43.	For those reasons we dismiss the appeal against the Penalty.
Summary
44.	We dismiss the appeals against both the Notice of Demand and the Penalty.  The Customs have asked for their costs on the basis that the Notice of Demand was fairly and squarely within the Customs’ power and the Bank had no reasonable excuse for failing to comply with it. In the light of our conclusions on the two points, we think the Customs are entitled to their costs and we award costs in their favour.  If the amount cannot be agreed, the question of costs should be referred back to the Tribunal for a further direction.

STEPHEN OLIVER QC
CHAIRMAN

RELEASED: 9 NOVEMBER 2005

LON/04/0232
LON/04/0036