Monday, October 05, 2009



Every so often there is a tax case decision that worries me. One such is the decision of Sales J in R (on the application of Corktech Ltd) v HMRC.

Mr Malde, the director of Corktech, had a VAT problem. He was an experienced exporter and knew that a sale within the EU does not attract VAT whereas a sale outside the EU but with the goods being situated in the UK at the time of the sale does so. In early 2005 he was approached by a Belize company with an office in Poland to sell goods to it for delivery to its own customer in Poland. It was a large order. Mr Malde hoped that he would obtain further sizeable orders from the Belize company. He was aware that VAT was chargeable on a sale to a Belize company but, as the goods would remain in the EU, thought it illogical to have to charge VAT. So what should he do?

VAT Notice 725, “Guide to VAT in the Single Market”, contained at the front “If you need general advice … please ring the National Advice Service (“NAS”) on XXX”. So Mr Malde did. He says that he spoke to a Mr Baker who, after checking, told him that he need not charge VAT if he included on his invoice and delivery note the address and VAT number of the Polish company. Fair enough! Well, it would have been had that advice been correct. In December 2006 Mr Malde received a visit from HMRC. They told him that he ought to have charged VAT on what by that time had been a string of sales to the Belize company and please could they have a cheque for £370,717 being the VAT that he should have charged plus interest plus a surcharge for late payment.

At that stage Mr Malde consulted a VAT specialist, Mr Mainprice – presumably the late Hugh Mainprice who, until his death last year, was a leading VAT practitioner. Mr Mainprice expressed the view to Customs that VAT was not due as “triangulation” applied. HMRC disagreed. Mr Mainprice then pointed out that Mr Malde had been told by the NAS in early 2005 that no VAT was payable. HMRC disputed that Mr Malde had been given any such assurance.

When the case came to court, Mr Malde gave evidence of the phone call. HMRC did not call Mr Baker to give his side of the story. He no longer worked for HMRC, although it is hard to see why that should have been a bar to calling him. Instead they called Ms Harris, who did not know Mr Baker but worked in NAS. She said that NAS staff are given nine weeks full-time training during which they are told, “not to give advice in the form of expressing their own views about the VAT treatment of a particular transaction but rather to give it in the form of directing the caller to the terms of the relevant parts of public guidance notices”.

So that’s what HMRC mean by customer service! They tell Joe Public if you need advice call NAS and they tell NAS that when Joe Public asks for advice, refer him back to the notice that told him to make the call in the first place. How helpful!!

But back to Corktech. Mr Baker had made a brief note, “Caller wanted to know about the supply of goods to an EC Member State and the VAT liability of the supply. Advised caller as per public notice 725 that they would be able to zero-rate the supply provided that the conditions in section 3 are met”. Mr Malde did not himself make a note of the phone call. There was no dispute that one of the 3 conditions in section 3 was not met. Mr Malde knew that it was not met. That is why he had called NAS in the first place! Indeed as an experienced exporter it is hard to think of any other reason for him to have called NAS at all.

Faced with the evidence of Mr Malde, no evidence from Mr Baker, a bland file note of HMRC and evidence from Ms Harris that Mr Baker should not have given the advice that Mr Malde said he did, what could Mr Justice Sales do? I would have expected him to have had to accept what Mr Malde told him as he had no evidence before him other than the fairly ambiguous file note, to contradict Mr Malde. After all the only other person who was aware of the phone call was Mr Baker and HMRC had chosen not to bring him along.

How naïve can 1 get! Mr Justice Sales reasoned that, as he had not heard Mr Baker, he could only conclude that Mr Baker had followed his training and that therefore Mr Malde must be lying. After all HMRC had not given him an opportunity to form his own view of Mr Baker, so it was only reasonable to assume that he had followed his instructions not to seek to help taxpayers. Sales J also pointed out that Mr Mainprice had initially told HMRC that his own view was that no VAT was due and it was only after he had lost that complex technical point that he had resorted to non-technical issues and had pointed out that, even if he were wrong on the technical point, Mr Malde was entitled to rely on the NAS advice. Sales J thought that Mr Malde should have said to Mr Mainprice something like, “It doesn’t matter what you as a VAT expert believe the VAT position to be; just tell HMRC about the advice I got from Mr Baker”. Personally I find this extraordinary. I would get fairly uptight if a client were to say something like that to me! Sales J also found it strange that, as a layman, Mr Malde did not make a note of the telephone call. After all lawyers are trained to do this, so clearly someone without any such training should have done it too!

But the real worry is what Sales J said next. He said that even if he had believed Mr Malde’s version of the phone call, he still would have upheld HMRC’s claim. This is because in R v CIR ex parte MFK Underwriting Agencies Ltd the Court of Appeal had said that if someone intends to rely on advice from HMRC – which is surely why most people seek such advice – “it is necessary that the taxpayer should have put all his cards face upward on the table. That means that he must give full details of the specific transaction on which he seeks the Revenue’s ruling … It is one thing to ask an official of the Revenue whether he shares the taxpayer’s view of a legislative provision, quite another to ask whether the Revenue will forgo any claim to tax on any other basis. It means that the taxpayer should indicate the use he intends to make of any ruling given”.

MFK involved a marketed tax scheme where the promoter had written an innocuous letter to HMRC asking them to confirm that the indexing element on indexed linked bonds was not taxable as income. They had not said that the reason they were asking is because they were trying to develop a tax avoidance scheme.

Sales J pointed out that in Mr Malde’s case “Mr Malde’s approach to the defendant was not in writing, involved only a telephone conversation of about six or seven minutes duration (with no prior notice to Mr Baker even of the broad nature of problem on which his view was to be sought) and did not involve full disclosure of the transaction and the perceived problem which Mr Malde wished to have addressed. In all these circumstances Mr Malde could not reasonably have thought that Mr Baker had given Corktech a fully considered and binding ruling in its favour”.

Unfortunately he did not say what he believed that Mr Malde could “reasonably have thought”. HMRC are just fobbing me off with the first thing that comes into their head to get rid of me? When HMRC tell me to phone for help they are trying to trap me and have no intention of helping me at all? If HMRC need further information to deal with my problem they will tell me, not simply make a guess based on what I tell them?

Mr Malde seems to me to have acted wholly reasonably in following HMRC’s instructions to phone them. I do not myself think that he could have been expected to be aware of the MFK Underwriting decision (a direct tax case not a VAT one) and the HMRC notice did not say that if he wants to rely on advice from HMRC he should ignore their instruction to call them and send them a detailed letter instead. Indeed I think that Mr Malde could have reasonably expected Mr Baker to have told him that if Mr Malde wished to rely on what he was telling him, he would have to write to HMRC in addition to speaking to Mr Baker.

Personally, I would have thought that a businessman phoning HMRC for help – at the suggestion of HMRC – on a commercial issue ought to be entitled to “reasonably have thought” that HMRC would help him and that, if in order to do so they needed more information, they would tell him what extra information they need. I would have thought it wholly unreasonable for him to have thought, “When HMRC tell me they will help me they are only going to let me speak to someone who has no ability to help me but has been trained to politely refer me back to their booklet”. Indeed if I had been Mr Malde and Mr Baker had simply told me to look again at the booklet, I suspect that I would have found it somewhat difficult not to have been fairly rude and very sarcastic when Mr Baker conveyed that message to me. Mr Baker must have been unbelievably thick-skinned not to have reflected that in his note.

Of course VAT specialists know that it is possible to contact NAS in writing even though HMRC do not advertise this fact to taxpayers such as Mr Malde. They also know that many years ago the then Minister, Mr Sheldon, told Parliament “if an [HMRC] Officer, with the full facts before him, has given a clear and unequivocal ruling on VAT in writing” HMRC will not seek to collect the tax that is due if that ruling turns out to be incorrect. At that time HMRC’s normal method of communication was by letter. It seems to me a bit unreasonable that in current conditions, where they urge people to deal with them by telephone, they should turn round and say that the taxpayer cannot rely on what they tell him on the telephone. But obviously my perception of reasonableness is very different to that of Mr Justice Sales.
Robert Maas