20793

INPUT TAX – Appellant registered as provider of exempt supplies childcare – subsequently it provided taxable supplies of management consultancy – Following advice from HMRC all its input tax reclaimed – Whether issue wrong advice justiciable in Tribunal – No 
MISDECLARATION PENALTY – Whether Appellant entitled to rely on wrong advice from HMRC as reasonable excuse – Whether HMRC given sufficient information – No 

LONDON TRIBUNAL CENTRE

	KIDEASE LTD	           Appellant

	     - and -

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

Tribunal: MISS J C GORT (Chairman)
                   MRS E R ADAMS, FCA, ATII 

Sitting in public in London on 21 April 2008

Mrs K Atkey, Director of the Appellant Company appeared on its behalf

Mr Paul Key of counsel, instructed by the Solicitor’s Office, appeared for the Respondents

© CROWN COPYRIGHT 2008

DECISION

1.	This is an appeal against an assessment dated 30 May 2003 in the sum of £17,172 plus interest for the periods 04/01 to 01/03. There is a further appeal against a misdeclaration penalty dated 6 October 2003 for the total sum of £2,023 for the periods 04/01, 07/01, 07/02 and 10/02. 

2.	The grounds of appeal against both are essentially that HMRC gave erroneous advice in respect of certain input taxes and as a consequence of that erroneous advice the Appellant is able to reclaim the input tax which is the subject of the assessment and is not liable to the misdeclaration penalty.

3.	The Appellant applied to be registered from 1 February 2001. Its main business activity was described as “Childcare/the provision of workplace nurseries”. At the time of the appeal and the decisions which are subject to appeal, it provided Human Resources and Management Consultancy as well as child-care vouchers.

4.	The only employees of the Appellant (“Kidease”) were the two directors who are husband and wife, Mr and Mrs Atkey. They were immediately successful in securing management consultancy projects with a number of companies because of the previous work experience of the two directors. Kidease did not do any work connected with the provision of childcare until the period 01/03, when the company opened a children’s nursery in Milford-on-Sea in Hampshire.

5.	In January 2002 Mr Atkey wrote to HMRC asking about the possibility of reclaiming VAT on expenses incurrent in providing childcare service, the cost of purchasing toys and equipment and the cost of building the nursery premises. By a reply dated 29 January 2002 he was informed by HMRC that “A registered business which makes both taxable and exempt supplies cannot charge VAT on the exempt supplies and equally cannot reclaim the VAT incurred on the purchases used to make those supplies. Where input tax cannot be reclaimed because it relates to exempt supplies, it is known as exempt input tax and the business is known as partly exempt. A partly exempt business will normally have to use an approved partial exemption method to work out how much of its input tax can be reclaimed and these methods are set out in the enclosed leaflet. You will need to consider your circumstances and apply a method if necessary” Notice 706 was included with that letter. 

6.	On the 24 October 2002 a Mr Mario Spinthiras, Kidease’ book-keeper/accountant called HMRC on behalf of Kidease saying that his client was opening a day nursery for children and wanted to know if this was an exempt or zero rated supply. He was informed that it was exempt, and, as their two businesses would be run from the same office, they would be partially exempt. He was told the standard method would be the best way to calculate it, but if it was not suitable he should write to HMRC stating with the method he wanted to use. A second telephone call was made by Mr Spinthiras on 30 October 2002 in which he asked if it was possible to reclaim VAT on a computer purchased for his client’s business which was a VAT registered nursery. He was advised that as long as it was for business purposes and they were VAT registered then they could reclaim the VAT. Mr Spinthiras also enquired whether they could reclaim the VAT on an extension that was being built to the nursery and was advised that as long as the company was VAT registered then it could reclaim the VAT. It is the advice given pursuant to this second call which is the subject of Kidease’ claim to have been misdirected.

7.	Until the period of October 2002 Kidease had made minimal purchases directly attributed to the exempt supply of childcare and had used the standard method for calculating residual input tax in relation to business overheads. Kidease submitted three-months VAT returns from the period 04/01 to the period 10/02, all but one of which were reclaim returns in varying amounts. On 29 January 2003 an officer of HMRC, Mr Sean Barrett visited Kidease’ premises. His visit report records that only one payment return had been made since the effective date of registration and it was a near-certainty that the trade was partially exempt, but was not using a partially exempt method. By a letter dated 6 March 2003 Mr Barrett wrote to Mr Atkey stating inter alia that he had attempted to contact him by telephone and had left a message confirming that the company could not reclaim the VAT incurred in respect of the Milford-on-Sea Nursery on its return for period 01/03. In that letter he explained the standard method for partial exemption and referred to VAT Notice 706. According to Mr Atkey, Mr Barrett in a further telephone call following his review of the figures for the periods 04/01 to 10/02 informed him that all input taxes were to be repaid, not just the exempt tax previously wrongly claimed. It was said by Mr Atkey that during the visit Mr Barrett accepted that Mr Atkey had been given wrong advice on this.

8.	Following the visit the Appellant did supply further records in respect of the periods 10/02 and 01/03, Mr Barrett already having the records for 04/01 to 10/02. Kidease did not provide revised calculations, as HMRC had requested, because Mr Atkey disagreed with Mr Barrett’s direction that all input tax should be disallowed. By the time of the hearing Kidease was operating six nurseries and was fully compliant as an exempt supplier, having chosen to operate its childcare voucher business as a separate registered company. 

The Respondent’s case

9.	It was accepted that certain sums could properly be reclaimed by Kidease, and the Commissioners were prepared to consider the total amount of this assessment upon Kidease preparing a proper partial exemption claim. 

10.	It was the Commissioners’ case that the Tribunal has no jurisdiction in a case in circumstances where the appeal is on the basis that the Commissioners gave wrong advice and mistakenly led Kidease Appellant to believe he could recover all the input tax. It was accepted by Kidease that input tax had been wrongly claimed. The issue for the Tribunal was whether an alleged misdirection by the Commissioners prevented the Commissioners from raising an assessment to reverse the wrongly claimed (and paid) input tax. The Commissioners’ position was that the appeal should be dismissed on two separate grounds:

(i)	The Tribunal does not have jurisdiction to deal with complaints of misdirection and
(ii)	In any event there was no misdirection.

11.	With regard to the Tribunal’s jurisdiction the Tribunal was referred to the following cases:

	A.	McCarthy (Trading as Autoelec)
	B.	Hospitality Training Foundation VAT Decision 18359
	C.	Phillips VAT Decision 19519
	D.	Denning (Trading as TB Cars) VAT Decision 19557
	E.	Vet Plus Limited VAT Decision 19850
	F.	C P Parsons VAT Decision 20033
	G.	Dr Kartic Chandra Ray VAT Decision 20526.
		J H Corbitt (Numismatists) Limited [1980] STC 231 (HL)
	H.	National Westminster Bank Plc [2003] STC 1072

12.	It was submitted that the appropriate place to challenge on the basis of misdirection was the Administrative Court where the Appellant should apply for Judicial Review. 

13.	With regard to whether or not there was a misdirection, it was the Commissioners’ case that on the facts there was no such misdirection, Kidease not having furnished the Commissioners with all the relevant evidence, at the time of the call on 30 October 2002. The Commissioners also relied on the correct advice given to Mr Atkey by the letter of January 2002 and to Mr Spinthiras in the telephone call of 24 October 2002. 

14.	In so far as the appeal against the misdeclaration penalty was concerned, whilst it was open to Kidease to submit that it had a reasonable excuse for its actions, in the present circumstances where there was no misdirection, there could be no reasonable excuse. It was acknowledged that when Kidease performed its partial exemption calculations, then some of the periods which incurred a misdirection penalty (see above) might fall away.

15.	It was submitted that Mr Atkey had asked for the relevant notice concerning partial exemption, he had read it and therefore he ought to have understood the position. The words ‘used or to be used’ in the notice made clear that it related to future supplies and the supplies claimed were clearly irrecoverable. It had never been suggested that Kidease was entitled to reclaim all the input tax. In addition the letter of 6 March 2003 informed Kidease of the partial exemption burden upon it. Mr Atkey could have been in no doubt that he was to provide a partial exemption calculation. 

Kidease’ Case

16.	Kidease’ case was that it had been misled by the Commissioners both during the telephone conversations and during the visit. The visiting officer had been given complete access to all the paper and electronic documentation. Following this visit, and being told by Mr Atkey that they were aware of their partial exemption status, the officer had announced that, following his review of the figures used for the VAT returns for the period 04/01 to 10/02, all claimed input taxes were to be repaid by Kidease. He had informed them that they appeared to have been given the wrong advice, but he made no reference to the figures being provisional nor the application of a manual adjustment as a method of reviewing the tax year ending 31 January 2003.

17.	Not only does the Appellant rely on its claim that it was given erroneous advice, the total amount of the assessment was disputed, as is the misdeclaration penalty. 

Reasons for Decision

18.	With regard to the assessment, we accept Mr Key’s argument that the Tribunal has no jurisdiction in such a case. The authorities are quite clear on this.

19.	With regard to the misdeclaration penalty, whilst Kidease did make considerable efforts to get correct advice, and did keep all necessary records and documentation, nonetheless, despite being told by the visiting officer, Sean Barrett, that he would have to employ a method to calculate the partial exemption, Mr Atkey persisted in claiming that he had understood as a consequence of his telephone conversations with the Commissioners that Kidease was entitled to recover all its input tax. It is apparent from the records that it was Mr Atkey’s accountant who had initially contacted the Commissioners and in his telephone call prior to 30 October 2002 the accountant had been given entirely correct advice. On the second occasion, when he was given incorrect advice, he had at no point set out the full circumstances and the advice he had been given was correct on the basis of what he had told the Commissioners. Both the accountant and Mr Atkey had ignored the advice, and Mr Atkey had also ignored the accurate written advice given by Mr Jones of the Commissioners in January 2002.

20.	Mr Barrett had allowed Mr Atkey six weeks to carry out the partial exemption exercise, but Mr Atkey did nothing. A reminder was sent but this also was ignored. It was in those circumstances that the assessment was raised. In the circumstances we do not find that the Appellant has a reasonable excuse for wrongfully claiming all his input tax: he was given every opportunity to submit a partial exemption method and he availed himself of none of those opportunities. 

21.	In all the circumstances this appeal is dismissed in its entirety. There is no order for costs.

MISS J C GORT
CHAIRMAN

RELEASED: 3 September 2008

LON/03/1034 and LON/07/889