19113
	VALUE ADDED TAX — partially exempt trader — failure to make correct partial exemption calculation — errors due to misunderstanding — under-declared tax agreed and paid — trader disputing assessment for interest and imposition of misdeclaration penalty — interest no more than commercial restoration — penalty properly imposed — no reasonable excuse but mitigation to five per cent appropriate — appeal allowed only to that extent

MANCHESTER TRIBUNAL CENTRE

 
 	
	ANDREW WILFRED SMITH	Appellant

	- and -

	HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

				Tribunal:	Colin Bishopp (Chairman)
						Marjorie Kostick BA FCA CTA 	

Sitting in public in Birmingham on 3 June 2005

The Appellant in person

James Puzey, counsel, of the Acting Solicitor for HM Revenue and Customs for the Respondents 

	© CROWN COPYRIGHT 2005

DECISION

1.	The Appellant, Andrew Wilfred Smith, carries on business as a funeral director in Lutterworth.  A funeral director normally makes a combination of supplies: the funeral arrangements themselves, which are exempt from VAT, as they fall within Group 8 of Schedule 9 to the Value Added Tax Act 1994; others which are standard-rated, such as the provision of flowers and headstones; and others still which are zero-rated, such as the order of service cards used at the funeral ceremonies.  There is a further complication in that a funeral director handles disbursements, such as the fees paid to the crematoria and cemeteries on behalf of his customers.  
2.	Because of the differing tax treatment of his supplies, Mr Smith is a partially exempt trader.  Until about 1995, it seems, his irrecoverable input tax fell below the de minimis limits and he was correspondingly treated as if he were fully taxable, but in or about 1995 his turnover rose to a level which brought his irrecoverable input tax above that level, and he became obliged to make quarterly partial exemption calculations, and annual adjustments.  Unfortunately, as he now accepts, Mr Smith did not make these calculations correctly but, as a result of repeatedly making the same error, under-declared his VAT liability for several years.
3.	In his return for period 12/02, Mr Smith claimed a repayment of £10,236.  The size of the claim prompted a verification visit, undertaken by Paul Trotman, who discovered the error, recalculated the tax for which Mr Smith was liable to account over the preceding three years (he could go back no further because of the statutory time limits)  and, in due course, raised an assessment.  Mr Smith, after taking advice from his accountant, agreed that the under-declared tax had been correctly assessed and he has paid the assessment.  However, he is aggrieved that in addition he has been required to pay interest on the tax assessed, and by the fact that, in respect of those, nine of the eleven periods assessed in which the objective criteria were satisfied, he has also been assessed to a misdeclaration penalty, within section 63 of the Act.
4.	Mr Smith represented himself at the hearing, and we heard informal evidence from him.  The Respondents were represented by James Puzey of counsel, who called Mr Trotman and another officer from whom Mr Smith had earlier sought advice, David Merriman; he also provided us with a bundle of documents.
5.	Mr Smith’s argument in respect of the interest was that it was unfair to impose the requirement on him.  His only source of the money necessary to pay it was his income from his business; if he was required to pay the interest he would have to pass it on to his customers by way of increased charges and it would effectively be his customers who paid. Though we can accept that the burden might ultimately be borne by Mr Smith’s customers, we cannot find in that fact any reason for varying the interest charge.  It has been calculated at normal rates and represents no more than compensation for the fact that Mr Smith has had the use of the Respondents’ money.  It is due for simple reasons of commercial restitution.  There would need to be much more, some special circumstance, for us to be able to conclude that interest should not be levied in a case of this kind.  A mere perception of unfairness is not enough.  And, as Mr Puzey pointed out, Mr Smith has not been required to pay some of the tax which he had under-declared because of the time limit which enabled Mr Trotman to go back for only three years.
6.	Mr Smith agreed that his under-declarations were due to his not having properly understood how to make his partial exemption calculation, even though he had several times sought advice from the Respondents.  In 1989, at a control visit, it was agreed that his irrecoverable input tax was below the de minimus limit, but he was advised to monitor his turnover.  It appears that Mr Smith did so since in 1994, he enquired about the recoverability of input tax he expected to incur in the refurbishment of his business premises, though receiving what he described as an inadequate reply.  It is true that the letter to him did not spell out in detail what his position might be, but that is a matter for no surprise since Mr Smith’s enquiry gave insufficient information for the Respondents to offer more than general advice; but the reply from the Respondents included two explanatory Public Notices, and an offer of further guidance if required.
7.	In April and in August 1996, two officers, from whom we did not hear evidence, visited Mr Smith and discussed with him, among other matters, his partial exemption calculations; it is apparent that by this time he had exceeded the de minimis limit and was unable to recover all of the input tax he incurred.  Mr Smith told us that the officers confessed that they did not themselves fully understand the partial exemption rules and that the advice they gave him was confusing.  In that, we are satisfied he is mistaken.  We think it unlikely that the officers did not understand the rules, particularly since one of them held at the time the position of Partial Exemption Liaison Officer.  It is entirely possible that they said they did not fully understand the details of Mr Smith’s business, but that is a rather different matter.   We do accept, however, that Mr Smith himself did not then understand how to apply the partial exemption rules, for in June 1996, that is between the two visits, he called in to his local VAT office, and spoke to Mr Merriman, then an enquiry officer.  However, he had not taken his complete records with him and Mr Merriman was able to offer only general advice.
8.	Mr Trotman’s evidence was that Mr Smith’s records were properly kept, and in particular that he had analysed his sales and purchases correctly so that a partial exemption calculation was possible; Mr Smith’s error had been to compile either the numerator or denominator (Mr Trotman could not remember which) incorrectly, with the result that he was arriving at an excessive amount of recoverable input tax.
9.	We learnt from Mr Smith that, even now, his business is of a modest size – his total annual turnover, including the disbursements he incurs on behalf of his customers, is less than £500,000.  He is a sole proprietor, with a small number of employees, most part-time, and he does his own bookkeeping.  His accountant prepares his annual accounts, but not his VAT returns, which Mr Smith makes up himself.
10.	Against that background, it is in our view impossible to say that there is a reasonable excuse for the misdeclarations.  We do not doubt that Mr Smith’s errors were due to a genuine failure to understand the manner in which a partial exemption calculation should be made and the Respondents do not suggest otherwise (we deduce from the absence of comment to the contrary that, as a result of Mr Trotman’s intervention, Mr Smith does now understand the method).  However, it is the trader’s duty to calculate and declare his VAT liability correctly.  Though it is true that Mr Smith sought advice, it is clear that he did not fully understand it, yet he did not make sure he was making his calculations correctly, by asking either the Respondents or his accountant to check a fully worked example.  He said he thought the Respondents should have supervised him, but that is quite unrealistic.  Moreover, Mr Smith had, as he conceded, some misgivings about the results he was achieving, all the more reason for searching the accuracy of his calculation.
11.	On the other hand, we do think there is scope for mitigating the penalty.  The Respondents have imposed the maximum 15 per cent in each of the relevant periods, apparently without even considering whether any mitigation should be offered.  Mr Trotman was not responsible for imposing the penalty – that was done by another officer – and told us that, had he been asked, he would have recommended some mitigation; but he was not asked.  In our view Mr Smith deserves credit for the facts, as we see them, that he was conscious of the need to make partial exemption calculations, that he kept proper records which could enable him to do so, that he made an effort to produce correct calculations, and that he sought some advice.  Nevertheless, he carried on when it should have been clear to him that he was struggling, and might be wrong, and when he himself had misgivings about the results he was achieving.  We have concluded that some penalty is appropriate, but that it should be reduced to five per cent of the relevant tax.  By our calculation, the aggregate of the penalty, as so reduced, is £1515.
12.	We allow the appeal to that limited extent.
                                                                  COLIN BISHOPP 
CHAIRMAN
Release Date: 9 June 2005

MAN/04/0038