In Sacutia Healthcare Ltd v HMRC [2018] UKFTT 699, the First-tier Tribunal (FTT) held that inaccuracies in a return were deliberate due to the taxpayer’s total lack of care and failure to check the accuracy of the information the taxpayer provided to its accountants for the purpose of preparing its VAT returns.

Background

Sacutia Healthcare Ltd (the taxpayer), was a supplier of healthcare products. The products were designed by the taxpayer and manufactured and packaged by third parties. Its sole director was Ms Barnes, although Mr Barnes, her father, undertook most of the work in the business on a day to day basis.

Following a visit by HMRC to the taxpayer’s premises, HMRC issued an assessment and imposed penalties relating to (1) the deduction of input tax claimed in the absence of VAT invoices and (2) output tax due to a lack of export evidence.

The taxpayer appealed the penalties on the basis that the errors did not arise from deliberate behaviour either on its own part, or on the part of Mr Barnes. The taxpayer argued that although it did not take every conceivable step to confirm the accuracy or otherwise of documents provided to accountants, or of the returns subsequently submitted by the accountants on its behalf, it did not knowingly provide inaccurate information and therefore the errors were not deliberate. 

FTT decision

The appeal was dismissed. 

The FTT considered that Mr Barnes did very little other than engaging accountants. For example, he admitted that he would not notice that an invoice sent to the taxpayer was addressed to the wrong business. His approach to VAT compliance was to simply send his records to his accountant. This information was unchecked and incomplete. He also did not check the returns when provided by the accountants and simply paid whatever he was told to pay in relation to VAT. In the light of this, the FTT had to decide whether Mr Barnes had been careless or whether the inaccuracies had been deliberate. 

The FTT considered the meaning of “deliberate inaccuracy” as discussed in Auxilium Project Managements Ltd v HMRC [2016] TC05024. Whilst the FTT agreed that some measure of knowledge is required for an inaccuracy to be made deliberately, it concluded that the taxpayer had the required knowledge for an inaccuracy to be deliberate because it knew it should take steps to check accuracy before returns were submitted to HMRC, but had failed to do so. The FTT distinguished deliberate behaviour from careless behaviour, where a taxpayer must have reasonable belief that the information was accurate. It added that engaging an accountant does not ensure accuracy. Mr Barnes therefore acted deliberately.

In addition to the penalties relating to the deduction of input tax, the FTT also had to decide whether there had been concealment in relation to exports. Given the seriousness which HMRC accorded to concealed inaccuracy in its guidance, the FTT was of the view that HMRC had not adequately explained to the taxpayer why it had treated the inaccuracy as concealed before imposing the penalty. As a consequence, the FTT held that HMRC had not discharged the burden of proof upon it to show that the penalty was correctly charged and substituted a penalty for deliberate behaviour.

Comment

This decision serves as a timely reminder that taxpayers must take steps to check the accuracy of returns before they are submitted to HMRC.  

Engaging an accountant does not, on its own, amount to taking adequate steps to ensure accuracy. Taxpayers should ensure that information provided to their accountants is accurate and check the information that is then produced by their accountant before it is sent to HMRC.

A copy of the decision can be viewed here.