20315

MISDECLARATION PENALTY – degree of mitigation – 40 per cent allowed by Customs increased to 90 per cent

LONDON TRIBUNAL CENTRE

FORD MOTOR COMPANY LIMITED	Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S
REVENUE AND CUSTOMS	Respondents

Tribunal:	DR JOHN F AVERY JONES CBE (Chairman)
ROY JENNINGS FCA FTII

Sitting in public in London on 15 August 2007

Les Allen, Dorsey & Whitney, for the Appellant

Gloria Orimoloye, Senior Officer of HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION

1.	Ford Motor Company Limited appeals against the mitigation of a misdeclaration penalty issued on 10 July 2006 potentially of £284,362.50 originally mitigated by Customs by 25 per cent and currently to 40 per cent amounting to £170,617.50.  Mr Les Allen appeared for the Appellant and Miss Gloria Orimoloye for Customs.
2.	We heard evidence from Mr Peter Neale-Smith, Director, European VAT & Customs Strategy and find the following facts:
(1)	Customs undertake an annual audit of the Appellant’s VAT affairs.  For the audit starting in July 2004 of the period February 2003 to July 2004 information was received from the Appellant in late 2005 and on 21 April 2006 from which the audit showed an error of about £1.8m in July 2003.
(2)	The Appellant identified a difference of £1,896,982 in July 2003 arising from an intra-group payment charged from Ford of Britain to the group finance company, FCE being a subvention claim settling a dispute relating to lease programs.  This was incorrectly debited to the VAT receivables account, ie treated as input tax, by Ford of Britain instead of being debited to the variable marketing account.  This treatment was queried by the VAT accounting analyst at the time who was assured that it followed the previous pattern and was correct.  He accepted the explanation.  In fact, while it did follow an earlier transaction, this transaction had been identified as incorrect and corrected.  In determining the reason for the error the Appellant found that the two employees referenced on the billing had left the company and they had to find the employee who had agreed the payment and who had been posted to Canada.  They had to make these enquiries in a short time because the period was about to go out of time for assessment and Customs needed an explanation by 30 June 2006.
(3)	While investigating the above difference the Appellant established that two further discrepancies related to two further payments being treated in the same way in November 2003 of £196,968.14 and January 2004 of £662,782.10.  The Appellant’s systems would not have discovered these errors at the time, although they would do so now.  The Appellant also brought six further discrepancies to Customs’ attention, two of which were still in time and were in the Appellant’s favour.
(4)	The £1.8m error triggered a misdeclaration penalty because it exceeded £1m.  It represents 0.108 per cent of the gross amount of tax for that month of £1.6bn.
(5)	The 40 per cent mitigation allowed by Customs was broken down in accordance with their guidelines in V1-27 (Civil Penalties) Section 15 as follows:
(a).	“How the infringement occurred: clerical errors particularly in complex circumstances where management controls are in place but have failed to spot the error”: nil on the scale from 10 to 50 per cent.
(b).	“Degree of co-operation in identifying and quantifying the error”: 10 per cent in the scale of a maximum of 50 per cent.
(c).	“Other actions which result in a saving of Departmental time and resources”: nil on the scale of up to 10 per cent
(d).	“Evidence of steps taken to correct systems in order to prevent similar errors in future”: 15 per cent on the scale from 5 to 25 per cent.
(e).	“Compliance history of trader over the last 3 registered years has been good”: 15 per cent on the scale of up to 25 per cent.
3.	Mr Allen contends for 100 per cent mitigation, suggesting the proper figures for each heading should be: (a) 25 per cent, (b) 50 per cent, (c) 10 per cent, (d) 15 per cent, (e) 25 per cent, which, since it would exceed 100 per cent, he limits to 100 per cent.
4.	Miss Orimoloye supports the officer’s mitigation, pointing in respect of (b) and (c) to the error having been discovered by Customs’ audit.
5.	Looking at the position in the round we consider that the proper degree of mitigation is 90 per cent.  We are not bound by Customs’ scales but if we were applying them we would have allowed 10 per cent under (a) on the basis that the complexity arises out the unusual nature of the transaction which fits the description as there were management controls in place which failed.  We would have allowed the full 50 per cent under (b).  While the audit produced a figure for an error it was the Appellant’s work that identified the error and its cause.  Since it was a single error of the amount identified no further quantification was required.
6.	Accordingly we allow the appeal to the extent of increasing the mitigation to 90 per cent.  Since the Appellant has substantially succeeded we also award the Appellant the costs of and incidental to the appeal to be determined in default of agreement by a Tribunal Chairman.

JOHN F AVERY JONES

CHAIRMAN
RELEASE DATE: 23 August 2007

LON/07/0749