19849
MISDECLARATION PENALTY — trader completing but failing to submit VAT returns and paying centrally issued assessments for less than the true amount of tax — cashflow difficulties — whether reasonable excuse for misdeclaration — VATA 1994 ss 63, 70 — no reasonable excuse — no mitigation found — appeal dismissed

MANCHESTER TRIBUNAL CENTRE

SUCKVINDER SINGH NAGRA & AMANDEEP KAUR NAGRA
Appellant
	- and -
THE COMMISSIONERS FOR
HER MAJESTY’S REVENUE AND CUSTOMS
Respondents

			Tribunal:	 	Colin Bishopp (Chairman) 
						Peter Whitehead												

Sitting in public in Birmingham on 11 October 2006 

Mr P P Patel, accountant, for the Appellants
Mr Richard Mansell of their Solicitor’s Office for for the Respondents 

© CROWN COPYRIGHT 2006
DECISION
1.	This is an appeal by Suckvinder Singh Nagra and Amandeep Kaur Nagra, who are husband and wife and who trade in partnership as sock and hosiery manufacturers from premises in Leicester, against the imposition on them of misdeclaration penalties amounting in total to £5,579. Mr and Mrs Nagra failed to submit their VAT returns for their accounting periods from 1 November 2002 to 31 December 2004 (there was a change of accounting period in that time) but instead paid centrally issued assessments. When a control visit took place on 11 July 2005, the Respondents discovered that in most of the periods their true liability for tax significantly exceeded the amount of the corresponding centrally issued assessment. All of the relevant returns had been prepared and, save for trivial errors of no present consequence, were accurate, but they had not been submitted. In due course an assessment was issued, to secure the difference between the tax actually paid and that due; and in respect of those periods where the objective criteria prescribed by section 63 of the Value Added Tax Act 1994 were satisfied, a misdeclaration penalty was imposed in addition. In each case the penalty amounts to 15 per cent of the difference between the tax actually due and that set out on the centrally issued assessment. 
2.	The Commissioners maintain that there is no reasonable excuse for Mr and Mrs Nagra’s failure to account for the correct amount of tax and that there are no mitigating factors which would justify their reducing the rate of the penalty from the maximum 15 per cent.
3.	We were told, in part by Mr Nagra and in part by Mr P P Patel, his accountant who represented the Appellants at the hearing, that Mr Nagra, initially with another person, had taken over part of the business of an old family friend. Apparently because of the longstanding friendship, Mr Nagra had not explored fully the terms on which it was agreed he and his then partner should take over the business, and it later emerged that, from their point of view, those terms were somewhat onerous. Mr Nagra’s partner, evidently realising that the business was not likely to make much profit in the foreseeable future, left and Mr Nagra took his wife into partnership instead. It appears that she was a working partner and we were told that, by virtue of their working long hours, they had eventually managed to make the business profitable and they were now paying off various debts which they had accumulated, owed to trade creditors and to the Respondents. For some time, however, they had had significant cash flow difficulties, partly because they had been obliged to grant extended credit to their customers in order to secure sales at all, and in part because of the onerous terms on which they had taken over the business in the first place. Because of those cash flow difficulties, Mr Nagra told us, he was advised by his bookkeeper (who, it appears, had formerly been employed by Mr Patel) that he should not submit the VAT returns which the bookkeeper had prepared, but should simply pay the significantly lower centrally issued assessments, and Mr Nagra had followed that recommendation. 
4.	Those parts of section 63 of the 1994 Act which are relevant to this appeal are as follows:
“(1)	In any case where, for a prescribed accounting period – 
(a)	a return is made which understates a person’s liability to VAT or overstates his entitlement to a VAT credit, or 
(b)	an assessment is made which understates a person’s liability to VAT and, at the end of the period of 30 days beginning on the date of the assessment, he has not taken all such steps as are reasonable to draw the understatement to the attention of the Commissioners 
and the circumstances are as set out in subsection (2) below, the person concerned shall be liable, subject to subsections (10) and (11) below, to a penalty equal to 15 per cent of the VAT which would have been lost if the inaccuracy had not been discovered. 
(2)	The circumstances referred to in subsection (1) above are that the VAT for the period concerned which would have been lost if the inaccuracy had not been discovered equals or exceeds whichever is the lesser of £1,000,000 and 30 per cent of the relevant amount for the period …
(10)	Conduct falling within subsection (1) above shall not give rise to liability to a penalty under this section if: 
(a)	the person concerned satisfies the Commissioners or, on appeal, a tribunal that there is a reasonable excuse for the conduct, or
(b)	at a time when he had no reason to believe that enquiries were being made by the Commissioners into his affairs, so far as they relate to VAT, the person concerned furnished to the Commissioners full information with respect to the inaccuracy concerned.”
Subsection (11) is of no relevance in this case.
5.	For the Respondents, Richard Mansell of their solicitor’s office contended that section 63(1)(b) clearly applied to this case—a proposition which Mr Patel did not challenge although the notice of appeal appeared to be based on the assumption that paragraph (a) was in issue—but that subsection (10) did not: Mr and Mrs Nagra knew, he said, that they were paying less than the amount which was due from them but took no steps at all to put the matter right until they had received a visit from the Commissioners’ officers. Again, Mr Patel did not dispute that proposition. His argument was that a penalty assessed at 15 per cent of the tax was too severe, and that we should reduce it. He relied upon the onerous terms upon which the business had been acquired, and the, as he maintained, severe cash flow difficulties which had been experienced and he pointed out that the returns, even though not submitted, had been prepared, and accurately, and that Mr and Mrs Nagra were now taking proper steps to put their tax affairs in order. He did not pursue an argument that there was a reasonable excuse, within the meaning of subsection (1), but asked that the penalty be reduced. 
6.	The power to reduce a penalty stems from section 70 of the Act which, as amended, reads as follows:
“(1)	Where a person is liable to a penalty under section … 63 …, the Commissioners or, on appeal, a tribunal may reduce the penalty to such amount (including nil) as they think proper.
(2)	In the case of a penalty reduced by the Commissioners under subsection (1) above, a tribunal, on an appeal relating to the penalty, may cancel the whole or any part of the reduction made by the Commissioners. 
(3)	None of the matters specified in subsection (4) below shall be matters which the Commissioners or any tribunal shall be entitled to take into account in exercising their powers under this section. 
(4)	Those matters are – 
(a)	The insufficiency of the funds available to any person for paying any VAT due or for paying the amount of the penalty. 
(b)	The fact that there has, in the case in question or in that case taken with any other cases, been no or no significant loss of VAT;
(c)	The fact that the person liable to the penalty or a person acting on his behalf has acted in good faith.”
7.	The obstacle in the way of Mr Patel’s argument lies in subsection (4). The proximate cause of Mr and Mrs Nagra’s failure to submit their returns and pay the tax is an insufficiency of funds. The tribunal is permitted to look behind that insufficiency in order to determine whether it was caused by a factor or factors which the taxpayer in question could not reasonably have foreseen, against which he could not reasonably have guarded, and which he could not reasonably overcome. Unfortunately for Mr and Mrs Nagra, it does not seem to us that any of those factors arises here. The onerous terms on which the business was taken over could have been avoided had there been proper negotiation but instead, as Mr Nagra accepted, he had simply taken what his friend told him on trust. The granting of extended credit is not unforeseeable, but a recognised normal hazard of trade. It is to Mr and Mrs Nagra’s credit that the returns had been prepared, and accurately, but that fact cannot in any way excuse or diminish the gravity of their failure to submit them. It is commendable that they have taken steps now to discharge their tax liabilities, but again that conduct does not excuse or reduce the gravity of the offence itself. 
8.	Although we have some sympathy with Mr and Mrs Nagra, it is, for the reasons we have given, impossible to find mitigating factors which would enable us to allow their appeal. We might add that even had the returns been submitted on time, Mr and Mrs Nagra’s failure to pay the tax would have exposed them to the imposition of default surcharges which, albeit starting at a lower rate, would have escalated to 15 per cent, a level of penalty which it is not open to the Commissioners or to this tribunal to reduce at all.

COLIN BISHOPP 
CHAIRMAN
Release Date: 25 October 2006
MAN/06/347