IS THIS THE SORT OF TAX AUTHORITY YOU WANT? - PART 12

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IS THIS THE SORT OF TAX AUTHORITY YOU WANT? – PART 12

I have been reading a couple of VAT cases that give me cause for concern – because in my view neither of them even have reached the Appeals Tribunal.

Christopher Kendrick was compulsorily registered for VAT by HMRC on the grounds that his taxable supplies exceeded the registration threshold. 

Mr Kendrick lived in a static caravan with his partner in Morecambe.  Both smoked.  Between them they used 3-4 pouches of hand-rolling tobacco a week.  Pouches of tobacco were sent to Mr Kendrick from overseas.  His explanation for this appeared incredible.  He admitted tobacco was sent to him and that he sold some of this to family and friends.  During the period 4 December 2009 to 22 August 2013, seven packages were intercepted by HMRC.  The first contained 22kg of tobacco.  Mr Kendrick expressed bewilderment about why he had been sent such a large quantity.  A further 4.25kg was received the next day.  Nothing was intercepted in 2010 or2011 but in August 2012, HMRC intercepted a package containing 7.5grams and 9 weeks later one containing 6 grams.  Nothing further was intercepted until April 2013 when HMRC intercepted a delivery of 4grams and then two further deliveries in August 2013 of 1.5 and 1.65grams.

I suspect that Mr Kendrick may have been evading import duties, but that is not what this case is about.  HMRC looked only at the first two items.  Added them together and divided by two to produce a “daily average” of £2,050.  If Mr Kendrick sold £2,050 of tobacco a day, he would exceed the then registration threshold in 34 days, so they registered him for VAT from 8 January 2010.  They used a different method to arrive at the turnover from 8 January 2010 to 22 August 2013.  They averaged all 7 deliveries, giving a daily average of £1046 and a total of £1.3m as Mr Kendrick’s taxable turnover for that period.

If HMRC raise an assessment they must do so to the best of their judgement, so the issue was whether they had used best judgement.  Mr Kendrick’s solicitor raised three fairly obvious points.

1.      If Mr Kendrick sold tobacco on the scale envisaged by HMRC and kept a minimum of two weeks stock, that would amount to 1,876 pouches.  How could Mr Kendrick keep such a quantity in a caravan?

2.      If Mr Kendrick sold all that tobacco, he would have needed considerable finance and there was no indication that he had any finance.

3.      If Mr Kendrick sold that quantity of tobacco, it would mean that he was supplying the tobacco to more than half of those individuals in Morecambe who smoke hand-rolled cigarettes.

The Tribunal held that best judgement was not relevant to the requirement to register, which is what was before them, not the assessment.  However, it also held that “based on all of the evidence, we think it much more likely that the initial package of 22 kilograms was not a daily supply but was intended to last for a number of days or possibly even weeks”.  It therefore held that HMRC had chosen the wrong registration date.

Why I find this worrying is that it is hard to see how anyone could make an assumption from the receipt of 7 packages over a four-year period, none of which were on consecutive days, and none of which were available to Mr Kendrick to sell (as they were held by HMRC), that packages were being received on a daily basis.  The second seize was the day after the first, but it was not made at an airport.  It was seized at Mr Kendrick’s caravan, but the HMRC Officer seizing it does not appear to have questioned Mr Kendrick on how long he had had it. Clearly the person sending it did not have time to become aware that the previous day’s package had been seized by HMRC.  No-one imports supplies day by day to meet their needs.  It is equally hard to see on what basis HMRC seem to have assumed that Mr Kendrick and his partner smoked none of the tobacco personally.  The case certainly gives the impression that very little thought was given to making the decision.  HMRC seem to have taken the view that a wild guess was okay as it would then be up to the taxpayer to prove it was wrong.

The other case concerns a scrap metal merchant, Ronald Hull Joinery Ltd.  The European Court has held that where there is a VAT fraud, a person claiming relief for VAT input tax is not entitled to deduct such tax if he knew or ought to have known that the supply was connected with fraud.

In Ronald Hull case, HMRC attacked transactions with two companies, GPSE and BMC. HMRC claimed that GPSE was a fraudulent trader on the basis that it went into liquidation without paying VAT for its final period of trading.  The Tribunal pointed out that HMRC had deregistered GPSE from VAT because it did not notify them of a change of address and refused to re-register it when it provided the new address.  The absence of a VAT number made it extremely difficult to operate in the scrap metal business.  The Tribunal pointed out that fraud was not the only possible reason for it not having paid its last VAT bill, “the other possibility for default is that the business failed due to the removal of the VAT registration”!  Furthermore, GPSE was not a customer of Ronald Hull; it was a customer of a supplier to Ronald Hull.  In these circumstances, HMRC had to show a connection between Ronald Hull and the GPSE supplies.  They claimed to do so by matching goods bought by Ronald Hull with goods sold by it between 44 and 82 days later.  The Tribunal thought it highly unlikely that a scrap metal dealer would leave metals in his possession for such a long period.

The second company was BMC.  The Tribunal accepted that BMC was a fraudulent trader.  It also accepted that Ronald Hull did not know that, so the question became should it have known.  HMRC said that the company was well aware that MTIC fraud was an issue in the scrap metal industry.  It had been provided with Public Notice 726 on a number of occasions.  The Tribunal pointed out that BMC had not engaged in MTIC fraud and that large parts of Notice 726 contain examples and details that are not relevant to the scrap metal industry.  BMC was Ronald Hull’s largest supplier but only accounted for around 14% of its purchases.

HMRC also said that they had discussed due diligence with Ronald Hull on a number of occasions.  In particular, they had suggested that the company should undertake credit checks on suppliers.  The company retorted that it did not give credit so credit checks were of no relevance to it.  HMRC also said that the company knew that the main directors of BMC had been involved in other companies that folded.  BMC denied that it knew that.  The BMC directors had a long history in the scrap metal business.  Ronald Hull performed due diligence on all its suppliers.  It obtained a copy of the business VAT certificate and bank account details.  They also checked the VAT registration with HMRC when they started to deal with a business.  HMRC said they should have checked more often (as an aside, it could of course be said that once HMRC confirmed that a business was VAT registered, if it later withdrew the registration it ought to have withdrawn its confirmation too – but any suggestion that HMRC has as much responsibility as taxpayers to help to prevent fraud is obviously unreasonable!).

Ronald Hull pointed out that HMRC had themselves told them that their due diligence was good; that despite asking HMRC what they should do with the information from a credit check they were not told; and when they told HMRC that they now review due diligence checks annually and asked if that were enough, they were told they should review the checks when they feel it is necessary, which is to say the least an unhelpful answer.

The Tribunal had little hesitation in holding that there was little to support HMRC’s claim that Ronald Hull should have known that BMC was a fraudulent trader.  It went as far as to say that, had it done greater due diligence, that would not have revealed that fact.

So why am I concerned about this case.  Firstly, it is clear that the Tribunal had strong reservations about HMRC’s evidence.  Indeed, they thought that the Officer’s second witness statement gave the impression “that he wants to discredit the Appellant’s witnesses but under cross-examination many of [his] criticisms of the Appellant’s witness statements are not borne out”.  Indeed, at one point it commented on one of the points in that statement, “this statement is either deliberately false or shows extreme lack of care in preparation of the witness statement”.  None of the HMRC Officers could agree on who had identified BMC as a fraudulent trader.

Secondly, as with Mr Kendrick, they seem to have been deaf to any possible explanations that did not fit their pre-conceived conclusions.

My overall impression is that HMRC had very little evidence to suggest that Ronald Hull had any inkling of the fraud, but seemed determined that someone should be punished for not having picked it up.

I do not think that is an approach that should be acceptable for any tax authority.

ROBERT MAAS