Wednesday, January 28, 2009



Imagine that you are the director of a property company. The company has £1.25m of bank loans and taking account of interest has a deficit on its balance sheet of £2.65m. The company has an option to buy a hotel, which it intends to turn into a block of flats. You register the company for VAT and opt to waive exemption. You exercise the option in March 2004 at a price of £15.5m plus VAT. You buy some adjoining land for £2m. You cannot raise the money for the development and on 1 April 2004 you sell the property for 17.7m plus VAT of £3.097m. In the quarter to 31 March 2004 you reclaim the input VAT, as the law requires you to do.

What do you do next? You know that you owe the bank £2.655m and at the end of July you will owe HMRC £3.097. If you use the input VAT recovered to pay the bank that would be a fraudulent preference. So would it be if you use it to pay HMRC.

Do you complete your VAT return and tell HMRC that you have no money to pay the amount shown as due? HMRC raise a computer-generated assessment and you pay that. How would you rate your chances of their not putting the company into liquidation?

The sensible thing is to consult an insolvency practitioner, which is what you do. On the advice of the insolvency practitioner you tell HMRC that that company cannot pay the VAT but you are expecting a profit on another development, which you hope will enable the company to do so in due course.

Would you be surprised if HMRC say that you have been dishonest, they want a 20% penalty which comes to £618,803 and that as you have been dishonest they have decided that the penalty ought to be paid by you personally?

Would you be more surprised if the VAT and Duties Tribunal were to say that, “We have accepted that at the beginning the Appellant had a genuine expectation of being able to pay the VAT out of other profits made by another associated company, this was looking doubtful by May 2004 and it is clear that this was not possible by September 2004. We have no doubt that ordinary people would regard this conduct as dishonest. It consists of deliberately keeping Customs in the dark about the amount of the liability for over seven months by the end of which it had become clear that the Company could not pay it”?
Whilst I do not of course condone what the director, Mr Conlon, did, I myself have strong doubts whether “ordinary people”, the “man on the Clapham omnibus”, would have regarded it as dishonest to keep Customs in the dark while he looked for a way to raise the money. I accept that “ordinary lawyers” probably would, but suspect that many “ordinary people” would have acted just as Mr Conlon did. After all there never was any money available to pay over the VAT and not selling the property would simply have made the company’s financial straits worse.


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