20690

MISDECLARATION PENALTY – Appellant (a sole trader) issued invoice for business advice – Supply not accounted for in quarterly return – Appellant argued reasonable excuse on basis of confusion – Argument rejected – Appellant argued that his co-operation with Respondents earned him more than 25% mitigation – Appeal dismissed

LONDON TRIBUNAL CENTRE

	RICHARD ADRIAN CARR	           Appellant

-	and –

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE & CUSTOMS 	 Respondents

				Tribunal:	SIR STEPHEN OLIVER QC (Chairman)
						MR P DAVDA					

Sitting in public in London on 2 May 2008

Alison Sampson, of Mazars, accountants, for the Appellant

Pauline Crinnion for the Respondents

© CROWN COPYRIGHT 2008

DECISION

1.	Mr Richard Adrian Carr appeals against a misdeclaration penalty issued on 1 February 2007.  It was imposed because he had failed to declare a receipt of £1m plus £175,000 of VAT in his return as a sole trader for the 03/06 period.  The undeclared tax was £170,000 and the penalty (before mitigation) was £26,250.

2.	Following reviews the penalty was mitigated by 25% making it £19,687.50.

3.	Mr Carr claims to have had a reasonable excuse for his misdeclaration; and he claims that the penalty should have been mitigated to a lower amount.  

4.	Mr Carr did not attend the hearing.  He left the explanations to be given by his representative, Alison Sampson of Mazars.  Alison Sampson had had no direct experience of Mr Carr’s misdeclaration until early February 2007, which was a few days after the penalty assessment was issued.  

5.	The explanation given in Mazars’ letter too HMRC of 22 February 2007 contains the following passages:

“Richard Carr procured the purchase of the site at Dolphin Quays for the Skelton Group.  The original agreement was such that Skelton would develop the property, and on disposal, recoup 100% of their equity.  Any additional profit was to be split on a 50-50 basis between Skelton and Richard Carr.  This would have formed a standard rated consultancy service.  However Skelton then did a deal with the Carlisle Group, and the property was then sold to a Skelton/Carlisle Group company.  

Following this development, the proprietor of the Skelton Group met with Richard Carr in order to establish a mutually agreeable financial settlement for Richard to walk away from the deal.  Richard did not want to come out of the deal, but the original gentleman’s agreement could not stand as the property had at that stage been transferred from the Skelton Group, and there was an arrangement in place between Skelton and Carlisle Group.  Richard Carr therefore stated that he would expect settlement of £1m in order to walk away from the arrangement.”

Pausing there, we mention that we heard no evidence from Skelton, Mr Carr or anyone else (such as Judy Young who provided him with financial and compliance services in 2006) filling in the details of those matters.  There was nothing to show when any of those events happened or how the deal was negotiated.  

6.	The letter goes on to say:

“At about the same time, the consultancy side of the business for Richard Carr was transferred to R A Carr Properties Ltd, leaving only the existing property portfolio within the sole proprietorship for Richard Carr.”

We know nothing about Mr Carr’s consultancy business or the manner in which it was transferred, as alleged in the Mazars’ letter, to R A Carr Properties Ltd (“Properties”).  We do know however that – 

(i)	Properties was incorporated in January 2006.

(ii)	By 26 April 2006 Properties had a current account with NatWest into 	which a CHAPS transfer payment of £100,000 was made by Skelton 	Group Ltd. On 2 May 2006 a further £100,000 was paid by CHAPS 	by Skelton. On 1 June 2006 a payment of £975,000 was paid by 	CHAPS by “Taylor Hessing” (presumably as agents for Skelton).

(iii)	On 25 July 2006 an application to register Properties for VAT was 	submitted by Judy Young.  Properties’ business and intended business 	activities were described as “buying land and constructing 	residential/commercial properties for sale”.  Box 13, which asks “Have 	you made any taxable supplies yet?”, was answered – “No”.  Box 18, 	which asks “From what date would you like to be registered?”, was 	answered – “1 April 2006”; on 27 October 2006 the date was changed 	to 29 March 2006.  At no point in the registration application was any 	mention made of any business transactions with or receipts from 	Skelton.”

7.	The Mazars’ letter goes on to say:

“Skelton Group paid R A Carr Properties Ltd directly, and the bank statements of that company clearly show that Skelton paid two part payments of £100,000 followed by a balancing figure of £975,000.  The VAT positions seems to have been complicated by the fact that R A Carr Properties Ltd had not been issued a VAT registration number at the time when the supply had to be invoiced, and that also the Skelton Group was somewhat late in paying.”

We have already referred to the payments to Properties.  It is correct that Properties were not registered for VAT: registration was eventually made in late October 2006 following investigations by Mrs C Moore for HMRC in September and October 2006.  (Mrs Moore gave evidence).  

8.	The Mazars’ letter goes on as follows:

“As the property consulting part of the business for R A Carr was transferred to R A Carr Properties Ltd, it was always the intention that this supply be invoiced from R A Carr Properties to Skelton.  The invoice that was issued on 29 March 2006 to Skelton was from R A Carr Properties Ltd, but, unfortunately, showed the VAT registration number of R A Carr’s sole proprietorship.  This was a mistake.”

9.	Mr Carr (who has not appealed against the VAT assessment for the 03/06 period) must be taken to accept that the £1m plus £175,000 VAT payment should properly figure as an output plus tax in his return as a sole trader for the 03/06 period.  The sole trader return for that period did not show the £1m plus VAT.  As it happened, the £1m plus tax receipt figures in the first return of Properties, a repayment return, for the period 29 March 2006 to 31 December 2006.

10.	Mr Carr is not facing a dishonest evasion assessment.  But on what basis did Mazars say that Properties had issued the invoice to Skelton of 29 March 2006 and that the use of Mr Carr’s sole trader registration had been a mistake (see paragraph 8 above)?  There was some suggestion that “Nicola”, Mr Carr’s PA, had issued the invoice to Skelton off her own bat.  In common with HMRC we do not accept that.  If Mr Carr, and Nicola, and Judy Young had come and given evidence, the position might have been different, but we doubt it. 

11.	We turn now to the evidence of Mrs Moore for Customs.  Customs learnt about the Skelton Group payment of £1m plus VAT some time in the summer of   2006.  A visit was paid by Mrs Moore and another HMRC officer to Judy Young’s office on 7 September 2006 in connection with Mr Carr’s returns as a sole trader.  Mr Carr was there. The sole trader VAT records show nothing relating to that payment.  Mrs Moore asked about Properties’ deals and was told about some supplies, but nothing about the Skelton Group receipt.  Mrs Moore went to Skelton Group and uplifted an invoice dated 29 March 2006 bearing Mr Carr’s sole trader VAT number; this stated the supply as “business advice” and charged £1m plus VAT.  The copy of the invoice produced to us by HMRC had no reference on it to Properties.  Mrs Moore returned to Judy Young and interviewed her and Mr Carr in October 2006.  She did not at that stage show Judy Young and Mr Carr the uplifted invoice of 29 March 2006.  In a letter of 22 December 2006 Mrs Moore stated her understanding of the receipt from Skelton Group as being that it related to Mr Carr’s business advice and introduction to a property deal.  She concluded that he had made the supply and, in the same letter, announced that an assessment would be issued to Mr Carr.  

12.	Mrs Moore asked Judy Young, in a letter of 15 January 2007, if there were “any queries regarding this matter, otherwise the assessment would not be issued”.  Judy Young appears to have made no reply and, following the assessment, the matter was taken up by Mazars who put forward the explanation in their letter of 22 February 2006 (the relevant parts of which are set out above).  

13.	Before leaving the facts, we mention one further episode.  It will be recalled that on 25 July 2006 Properties’ application for VAT registration had been submitted.  The day before that (24 July), a letter was sent by Properties to “Skelton Group”.  It is written by a person described as “Group Finance Director” and it reads as follows:

“I enclose a copy of the credit note for the Invoice made out to you for £1m plus VAT, as it transpires, the wrong VAT number was applied to the invoice and in fact the VAT number that was placed on the invoice related to R A Carr t/a Richard Carr which ceased to trade on 1 April 2006.  I enclose a new invoice for the same and trust this is self explanatory.”

The suggestion that Properties had made out an invoice to Skelton Group is contradicted by Mrs Moore’s note of her visit of 7 September 2006 to Judy Young and Mr Carr; she reports Mr Carr as stating that “no sales invoices had yet been issued by the limited company”.  The statement in the letter of 24 July 2006 that Richard Carr ceased to trade as a sole trader on 1 April is contradicted by his explanation to Mrs Moore at the 7 September visit.  The visit report records Mr Carr’s explanation that Properties “will take over the operation of R A Carr, sole proprietor.  All ongoing projects will continue through the sole proprietor but any new projects will be operated through R A Properties Ltd”.  Finally in this connection, the statement that the “wrong VAT number was applied” is plain misleading.  Properties had not at the time applied to be registered.

14.	We have no reason to doubt the accuracy of Mrs Moore’s note.  We observe that the “Credit Note” had Mr Carr’s sole trader registration number on it.  It was accompanied by an “invoice” of “April 2006” for “Business Services” with Properties’ name at the head and Mr Carr’s sole trader number at the foot.  Another “invoice” from Properties to “Skelton Group” for Business Services, dated April 2006 was produced at the hearing.  That last invoice said “VAT number applied for”.  Alison Sampson said that it had been produced “for Sage purposes”.  We cannot resist the conclusion that those two invoices and the credit note were produced as an attempt to improve on the true position.  

15.	With those factors in mind, we make the following observations:

(i)	Mr Carr has not challenged the assessment on the grounds that Properties and not Mr Carr as a sole trader made the supplies to which the invoice of 29 March 2006 relates.

(ii)	It was in any event highly unlikely that Properties earned any entitlement to the £1m plus VAT payment from Skelton Group.  It had only been incorporated in early 2006; it had not been registered.  The Mazars’ explanation in their 22 February 2007 letter that the invoice was from Properties is without foundation.  The Mazars’ assertion that the invoice mistakenly used Mr Carr’s sole trader registration is baseless.  The Mazars’ assertion that the consulting business had to be transferred at “about the same time” (i.e. when the Skelton Group made the payment) is pure surmise.  

(iii)	We are satisfied that Mr Carr misdeclared his VAT liability for the 03/06 period by £175,000.  

(iv)	Mr Carr and Judy Young volunteered no information about the 29 March 2006 invoice, leaving it to Customs to discover the true situation, i.e. that it had been issued by Mr Carr as a sole trader.

(v)	The explanation advanced by Mazars, on instructions, in the course of the hearing that “Nicola” had mistakenly issued the invoice of 29 March 2006 is without foundation.  

Was  there a reasonable excuse?

16.	The case for reasonable excuse is that Mr Carr demonstrated that he had been alive to and had accepted the need to comply with his VAT responsibilities.  There had, it was said, been some confusion/misunderstanding over the legal entity that was liable to account for output tax on the Skelton transaction.  We do not accept this.  The invoice of 29 March 2006 was issued by Mr Carr as a sole trader to Skelton (Poole) Ltd “for business advice”.  It related to Mr Carr’s supplies as a sole trader.  At that time Properties was incorporated but no application had been made for registration; there was no evidence that Properties made any supply of any of the “business advice” services.  We infer that Mr Carr and those responsible for the misdeclaration were well aware that the supply shown by the 29 March 2006 invoice should have been accounted for in Mr Carr’s 03/06 return.  

Mitigation

17.	The matters raised at the hearing and a careful review of the documentary evidence since then have persuaded us that Mr Carr earned no mitigation whatever.  We cannot, in the circumstances summarised above, see any co-operation or partial co-operation by Mr Carr.  We recognise however that it would not be proper to ignore the 25% mitigation given to Mr Carr by HM Revenue and Customs.  

Conclusion

18.	For the reasons given above we dismiss the appeal (leaving in place the 25% mitigation).

SIR STEPHEN OLIVER QC
CHAIRMAN

RELEASED: 23 May 2008

LON 2007/1880