03 May 2023
A recent First-tier Tribunal hearing has seen a company director successfully appeal against penalties raised by HMRC for deliberate behaviour in his failure to submit company VAT returns. In the case of Universal Flooring (Contractors) Limited, underpaid VAT liabilities amounting to around £372,000 were identified.HMRC took an aggressive approach in its interpretation of the behaviour which had led to the underpaid liability, and issued penalties of nearly £91,000 against company director, Mr Mackley, personally. HMRC’s view was Mr Mackley had acted deliberately, arguing that the money that should have been used to settle the company’s VAT liabilities had been retained and used in the operations of the business as working capital and the lack of attention to the filing requirements of the company was due to his dishonesty.
However, Mr Mackley successfully argued he had not acted deliberately and did not knowingly underpay the company’s VAT, but instead his poor organisation with regard to the completion and submission of the VAT returns, along with a general lack of paperwork was the reason behind the failing. Being a workaholic meant he had little time to focus on the administration of his business.
During the hearing, Mr Mackley admitted he only ‘blitzed’ the VAT returns when he had to and signed accounts despite not understanding them in detail. This resulted in him failing to submit the relevant VAT returns, but also failing to submit returns showing repayments of overpaid VAT due from HMRC. This haphazard approach ultimately helped persuade the tribunal that, whilst he may have been reckless, he was not dishonest and had not acted deliberately in failing to submit the returns, and that the fact that the company did not seek repayment of the overpaid VAT when the overpayments became apparent suggested it was more likely that either he had no ongoing awareness of the company’s VAT position, or that the company had no need of the money as working capital.
Although unusual, this case highlights HMRC’s often aggressive approach when it comes to the assessment of behaviour when considering issuing penalties. Where deliberate behaviour is concerned, HMRC must be able to demonstrate that an individual has acted knowingly, and it was unable to prove that in this case. The tribunal determined that the underpayment of VAT was down to poor administration and, although Mr Mackley took an unsatisfactory approach towards his compliance obligations, he had no deliberate strategy in not submitting his returns and underpaying HMRC. There was no evidence to suggest the basis of the underpayment was to use the funds to pay other creditors or maintain the company’s working capital. In these circumstances, the tribunal determined that Mr Mackley’s behaviour was not deliberate and instead amounts to him acting carelessly, which generally attracts lower penalties than deliberate behaviour.
It is not unusual for HMRC to push the boundaries in its assessment of penalties and seek higher penalties when the facts of the case may warrant otherwise. This is something individuals, businesses and advisers should be aware of and be prepared to challenge where appropriate.