DECISION
1.
Copthorn Holdings Limited (“CHL”) appeals against:
(1)
the refusal by the Respondents (“HMRC”) to accept belated notification
of an option to tax in respect of land at Unity Mill, Heywood, Lancashire and
against a consequent assessment to VAT made on CHL (“the First Appeal”);
(2)
a misdeclaration penalty in respect of that assessment (“the Second
Appeal”);
(3)
the decision by HMRC to refuse retrospective inclusion of Countryside 28
Limited (“C28”) in the CHL VAT group (“the Third Appeal”);
(4)
the decision by HMRC to refuse to allow CHL’s application to include
Countryside 26 Limited (“C26”) in the CHL VAT group with retrospective effect
(“the Fourth Appeal”).
The First, Second and Third Appeals were consolidated
under reference TC/2010/08402, the Fourth Appeal being numbered TC/2011/02644.
It had been directed by a Judge that the appeals under these respective numbers
should be heard consecutively, for two days each; as will appear from this
decision, this direction was not followed, and all the appeals were heard
together, dealing separately with the factual issues concerning C28 and C26.
The background facts
2.
The evidence consisted of a bundle of documents and correspondence,
together with two witness statements given by Ms Wendy Colegrave, the Group
Finance Director for the Copthorn Holdings Limited Group. In addition to her
witness statements, Ms Colegrave gave oral evidence, and (as explained below)
was later recalled to give further oral evidence. From the evidence we find the
following background facts.
3.
Copthorn Holdings Limited (“CHL”) is the holding company of the CHL
corporate group. CHL is also the representative member of the CHL VAT group.
The corporate group and the VAT group are not coterminous, as the corporate
group is larger than the VAT group. The CHL corporate group is a large and
extensive group, with a substantial number of subsidiaries. A number of those
subsidiaries are classified as dormant. As this decision relates to a number of
appeals, we set out separately the background facts relating respectively to C28
and C26, the two separate companies within the corporate group whose circumstances
have given rise to the matters under appeal.
The facts relating to C28
4.
According to its Directors’ Report and Accounts for the period ended 30
September 2007, C28 was incorporated on 23 February 2007. C28 was a
wholly-owned subsidiary of Countryside Properties (UK) Limited (“CPUKL”), and
its ultimate parent company was CHL.
5.
The business of CPUKL, which had at an earlier stage been a publicly
listed PLC, was (and continues to be) that of a developer of residential
property; the nature of its business is such that to a preponderant extent the
CHL VAT group is treated as a fully taxable person, although (as Ms Colegrave
stated in oral evidence) the extent of partial exemption may vary from year to
year.
6.
A VAT “Group Registration Record” provided to CHL by the Respondents
(“HMRC”) on 17 June 2010 showed the companies included as at that date in the
CHL VAT group; C28 did not appear in that list.
7.
On 26 July 2007 a corporate meeting was held in Warrington. Ms Colegrave
referred to this in evidence as a meeting of the CPUKL Northern Divisional
Board. Details of the meeting were recorded in a document described as “Countryside
Properties (Northern) Limited: Minutes of the Meeting of the Board of Directors
held on Thursday 26 July 2007. . .” We consider later in this decision the
question of the entity to which the decisions taken at that meeting related.
8.
The meeting lasted from 8 am until 1.45 pm. In the Minutes, under the
heading “Operational Review”, discussions concerning a number of property
projects were recorded. The final one under that heading was as follows:
“Unity Mill, Heywood
Outline planning permission granted. Scheme has
potential for betterment in density, said BJC. Layout is only at preliminary
stage and needs improving. GSC considers the sales and marketing costs to be
too tight. Land to be owned by new SPV, but IHS explained that contractually
land to be acquired by CPPLC. WEC said that CPPLC could acquire land and then
sell to SPV, but VAT needed to be charged between CPPLC and SPV. It was,
therefore, agreed that an election to waive VAT exemption would be made by
CPPLC.
Pack needs to come down to Brentwood for next CMC
meeting.”
9.
On 27 July 2007 the Unity Mill property was sold by Tetrosyl Properties
Limited (“Tetrosyl”, an independent third party) to CPUKL. The price was £12.5
million, exclusive of VAT. As Tetrosyl had elected to waive exemption in
respect of the property, VAT of £2,187,500 was payable. Contracts were
exchanged on 27 July 2007 and completion was on 30 July 2007. In the contract
for sale, the Buyer was identified as CPUKL, and the Transferees were Countryside Properties Land (One) Limited and Countryside Properties Land (Two) Limited (“the
Nominees”). The contract specified that £6 million (plus VAT) of the purchase
price was to be paid on completion, and the balance of £6.5 million (plus VAT)
was to be paid on the expiry of a lease from CPUKL to Tetrosyl.
10.
The transaction was completed on 30 July 2007 by two transfers of the
land. The first (“Transfer 1”) was from Tetrosyl to the Nominees, by direction
of CPUKL. The consideration, receipt of which was acknowledged, was £12.5
million. No reference was made in the Transfer 1 document to VAT, or to the
payment of the consideration by instalments. The second transfer (“Transfer 2”)
was from the Nominees to C28. The Transfer 2 document was in similar form, showing
the consideration as £12.5 million without mention of VAT or payment by
instalments, and indicating receipt by the Nominees of that amount from C28.
11.
Two Stamp Duty Land Tax (“SDLT”) Land Transaction Return Forms were
completed. The first gave particulars of the sale from Tetrosyl to the
Nominees. One page was missing from the copy of this form included in the
bundle, but we find, on the basis of the second form described below, that the
purchasers were the Nominees (the second nominee company being shown as
“Additional Purchaser” in this first form). The consideration, including VAT,
was shown as £14,687,500, of which the VAT element was identified as
£2,187,500. The second nominee company was declared to be acting as trustee; on
the basis of our above finding, we further find that the first nominee was also
declared to be acting in the same capacity.
12.
The second Form SDLT 1 gave particulars of the sale from the Nominees
(particulars of both being given in the form) to C28. The details of the
consideration were the same as in the first form. In the details relating to
C28 as purchaser, it was declared that C28 was not acting as a trustee.
13.
Tetrosyl rendered two VAT invoices for the consideration, dated
(respectively) 30 July 2007 and 7 December 2007. The invoices were addressed to
CPUKL and the Nominees. Pursuant to the invoices, payment was made in two
stages. The first instalment of £6 million plus VAT was paid in July 2007, and the
second, of £6.5 million plus VAT, was paid in December 2007.
14.
As CPUKL was a member of the CHL VAT group, CHL as representative member
recovered input VAT in respect of the purchase in the group VAT returns for
July 2007 and December 2007.
15.
In an undated letter received on 10 February 2010 by Richard Sharp, the
Group Financial Controller of the CHL corporate group, Mrs Howes, an officer of
HMRC dealing with VAT matters, indicated that she had been unable to trace any
VAT registration number for C28. She understood, from the Directors’ Report to
the annual accounts for the year ended 30 September 2008, that C28 had acquired
a freehold interest in land known as Unity Mill. She asked whether full
planning permission had since been obtained, what supplies C28 intended to
make, and what its VAT registration number was, if it had one.
16.
A note of meeting made by Mrs Howes showed that on 26 February 2010, Ms
Colegrave and Mr Sharp met Mrs Howes and her colleague Chris Harcourt (an
Inspector of Taxes) to discuss the position concerning C28, as Ms Colegrave had
asked for a meeting. Ms Colegrave had discovered that C28 had incorrectly been
treated as part of the CHL VAT group, and that VAT in the region of £2 million
had been claimed by the VAT group.
17.
At the meeting, Ms Colegrave explained the history of the Unity Mill
transaction. The property had been acquired with the intention from the outset
of developing the land for residential use. It had been decided that the
property should be transferred into a “stand-alone” entity in case it was
decided to enter into a joint venture arrangement in relation to the site. The
immediate transfer from CPUKL to C28 on the same day would have worked if C28
had been in the VAT group.
18.
She explained that there had been changes in personnel around the time
of the transactions. [We consider this at a later stage below.] Planning
permission had since been obtained, and there had been £140,000 of expenses in
relation to the intended development upon which VAT would have been claimed in
the VAT group. CPUKL had claimed the VAT and gone on to make an exempt supply.
It was peculiar that there was no paper trail in respect of the transactions
involving C28. She had looked into the possibility of C28 applying to be a
member of the VAT group with retrospective effect. This was discussed at the
meeting; HMRC’s view was that the situation which Ms Colegrave had described
did not fall within “exceptional circumstances” as referred to in HMRC’s VAT
Manual.
19.
Mr Harcourt raised the question whether CPUKL could give a belated
notification of an “option to tax”. Mrs Howes distinguished between a belated
notification of a decision to exercise an option and the notion of a backdated
option to tax; there was no such thing as the latter. She explained that in the
absence of an option to tax, the input tax was not deductible within the VAT
group. She referred to checking pre-registration input tax in the event that
C28 registered for VAT as a single entity. She then discussed questions
relating to penalties.
20.
In a letter to Mrs Howes dated 16 March 2010, Ms Colegrave referred to
the board minutes (see paragraph 8 above). She asked for guidance on how to
progress with a retrospective “opt to tax” application.
21.
On 17 March 2010 Mrs Howes wrote to Richard Sharp setting out HMRC’s
views on the matters discussed at the 26 February meeting. In relation to the
possible application by C28 for retrospective VAT group membership, this could
be accepted only in “exceptional circumstances”; the situation described at the
meeting was not considered to amount to such circumstances so as to permit
agreement to such a retrospective application.
22.
In relation to belated notification of an option to tax, Mrs Howes’
understanding from the discussion at the February meeting was that no decision
to opt to tax had been taken. As a result, an exempt supply of the land had
been made to C28. She commented that, if CPUKL had had a valid option to tax
(and she had seen no evidence that this was the case), then the input tax would
be attributable to a taxable supply of the land to C28, which was outside the
VAT group. This was on the assumption that the option to tax was not
disapplied. She set out a summary of the relief for pre-registration VAT, but
emphasised that she was not aware that CPUKL had made a decision to opt to tax.
23.
Mrs Howes indicated that she intended to disallow the VAT claimed by the
VAT group in connection with the C28 development. She asked for confirmation
that the amounts set out in the letter were correct, and for any comments or
additional information. She also asked for information concerning the
expenditure of £140,000.
24.
Following further correspondence, Richard Sharp wrote on 25 March 2010
to HMRC’s Option to Tax Unit enclosing form VAT 1614A in respect of a belated
application to notify an option to tax. He also enclosed a copy of the Board
Minute as set out at paragraph 8 above.
25.
On 27 May 2010, Mr Sharp wrote to Mrs Howes in response to her letter dated
29 April 2010, in which she had requested further information. Among the information
which he provided, he confirmed that C28 had paid SDLT of £587,500 in August
2007 following the transfer of the land from CPUKL. The SDLT had been
determined on the VAT inclusive amount of £14,687,500. In an appendix (which
HMRC subsequently indicated that they had not received, so it was forwarded by
email on 9 June 2010) the total input tax incurred by C28 was set out, with
details of the periods and respective amounts incurred in each period. The
total was shown as £158,763.
26.
On 29 June 2010 HMRC’s Option to Tax Unit wrote to Mr Sharp, explaining
that as a result of discussion with Mrs Howes, it appeared that exempt supplies
might have been made as a result of the sale of Unity Mill, on which VAT was
not charged. HMRC asked that an authorised signatory should provide an
explanation as to why no VAT was charged on this transaction, as this was after
the requested effective date of the belated notification of option to tax.
27.
On 22 July 2010 Mrs Howes wrote to Mr Sharp. She referred to certain
requested information remaining outstanding. She enclosed a Notice of
Assessment in respect of VAT. This contained two assessments, the “Preferred
Assessment” and the “Alternative Assessment”. The Preferred Assessment was
divided between two VAT periods, ie £1,050,000 in respect of period 07/07 and
£1,137,500 in respect of period 12/07. The Alternative Assessment was in the
sum of £2,187,500 in respect of period 07/07.
28.
She explained the background to the Preferred Assessment, and stated
that the VAT claimed of £2,187,500 was considered to be attributable to an
exempt supply of the land, and non-deductible. She then set out the reasons for
the Alternative Assessment; to protect HMRC’s position, if the Option to Tax
Unit were to accept the belated notification, output tax would be due in
respect of period 07/07 on the disposal of the property. She also referred to
the effect of the misdeclaration penalty rules. In relation to the development
costs, she indicated that she would be disallowing the claims; a Notice of Assessment
in the amount of £158,766 would follow. If the Option to Tax Unit were to
accept the belated notification, there might be an element which related to the
acquisition of the property and the onward supply; she requested details within
30 days.
29.
On 2 August 2010, Ms Colegrave wrote to Ms Thompson at HMRC’s Option to
Tax National Unit. The main part of her letter stated:
“As requested, I am writing to explain why despite
our having made an option to tax, it appears that we did not act in accordance
with the option to tax when we did not charge VAT on the transaction in
question.
1. In anticipation of the future exploitation of the
property, a decision to opt to tax was made on 26 July 2007, during the board
meeting of Countryside Properties (Northern) Limited, which is a member of the
VAT Group Registration.
2. The land was then acquired by Countryside
Properties (UK) Ltd on the purchase.
3. Input VAT was claimed by Countryside Properties
(UK) Ltd on the purchase.
4. On the same day, the land was then sold to
Countryside 28 Ltd, which was erroneously assumed also to be a member of the
Group VAT registration. On this basis no VAT invoice was raised, on what was,
erroneously, treated as an intra-VAT Group transaction.
5. VAT would, of course, have been properly charged
had it been identified at the time that Countryside 28 Ltd was not a member of
the Group VAT registration.
In summary, therefore the original transaction was
that Countryside Properties (UK) Ltd transferred the land to Countryside 28 Ltd
on the same day that it was purchased. Although we had made an option to tax,
the transfer was not treated by us as an exempt supply for the purposes of VAT
due to two separate errors/oversights on our part.
1. The decision to opt to tax had previously been made
and recorded, however was not notified due to a clerical oversight.
2. Countryside 28 Ltd was treated as being included
in the Group VAT registration. I can confirm that Countryside 28 Ltd is not as
a company registered for VAT.
Unfortunately, the errors took place in the
department during a six month period when several senior members of staff had
resigned or were working their notice periods, and we can only offer our
sincere apologies for the errors and omissions which have arisen as a
consequence.
I confirm that I signed the VAT 1614A form on behalf
of the Company.
I trust this provides you with the explanation you
require, and that, in the circumstances, you will now be able to accept our
belated notification of the Option to Tax. I apologise again for the
inconvenience this matter has caused.”
30.
On the following day, Ms Colegrave wrote to Mrs Howes, enclosing a copy
of the above letter, and explaining that CHL proposed to make a payment to HMRC
on the basis of the Alternative Assessment.
31.
On 19 August 2010, Ms Colegrave wrote again to Mrs Howes requesting a
reconsideration of HMRC’s decision in relation to the assessment against CPUKL
in respect of the disposal of Unity Mill to C28, and also in relation to the
misdeclaration penalty.
32.
On 24 August 2010 Ms Thompson of the Option to Tax National Unit wrote
to Ms Colegrave to inform her that HMRC had decided not to exercise their discretion
to extend the period for notification of an option to tax. (The terms of this
letter are considered later in this decision.)
33.
On 7 September 2010, Ms Colegrave wrote to Ms Thompson requesting an
independent review of the decision, and setting out further explanations of the
matters raised in the 2 August letter. Ms Colegrave requested HMRC to
reconsider their decision not to exercise their discretion to accept CPUKL’s
belated notification.
34.
In a letter to CHL dated 29 September 2010 Steve Braeger, an officer in
HMRC’s Appeals and Reviews Unit, set out the results of his review of Mrs
Howes’ decision in respect of the Preferred and Alternative Assessments, and of
Ms Thompson’s decision not to accept belated notification of an option to tax.
He set out in detail the history, and in his conclusions referred to the HMRC
policy requiring output tax to be properly charged and accounted for “from the
date of the supposed option”. He continued:
You have said in your letter dated 7 September that
output tax was not charged/accounted for on the supply to Countryside 28 Ltd
because you mistakenly believed Countryside 28 Ltd was in the same VAT group as
Countryside Properties (UK) Ltd.
I have not seen any credible evidence to show that
you had reasonable grounds to believe that Countryside 28 Ltd was in the same
VAT group as Countryside Properties (UK) Ltd. No application to include
Countryside 28 Ltd in the same group registration has ever been received and
you have not claimed that any such application was ever made.
I have also noted there is no mention in the minutes
of the board meeting that took place 26 July 2007 of including Countryside 28
Ltd in the VAT group. Indeed, there would have been no need for your advice to
the Board that ‘VAT needed to be charged between CPPLC and SPV’ if there was an
intention to include Countryside 28 Ltd in the group registration. This is
because, as you have pointed out, if Countryside 28 Ltd was included in the
group registration the supply would have been disregarded and no VAT would have
needed to be charged.
I do not therefore accept that there are reasonable
grounds for you believing that Countryside 28 Ltd was in the VAT group and that
the supply made to them could properly be treated as a disregarded taxable
supply.
As output tax has not been properly charged and
accounted for on the supply of the property since the date of the supposed
option I have concluded that the decision not to exercise our discretion and
accept the belated notification of the option to tax should be upheld.
Because the belated notification of the option to
tax has not been accepted it follows that the supply of the property to
Countryside 28 Ltd is an exempt, rather than a taxable supply. The input tax
claimed on the purchase of the property is therefore attributable to that
exempt supply and consequently the preferred assessment, to disallow the input
tax, is upheld.
My decision means that the alternative assessment,
charging output tax on the sale of the property, is cancelled.”
35.
On 1 October 2010 another HMRC officer, Mr Gradwell, wrote to CHL. He
referred to Mr Braeger’s letter, and continued:
“Having read the letter I note that in the final
paragraph of the section entitled ‘My conclusion’ Mr Braeger has advised that
the alternative assessment issued by Lynne Howes on 22 July 2010 has been
cancelled.
Having taken advice, I have to advise that the
cancellation of the alternative assessment was made in error. Therefore, to
correct the position I enclose for your attention a replacement alternative
assessment in the sum of £2,187,500.”
36.
In a letter to CHL dated 15 October 2010, HMRC gave notice of assessment
of a misdeclaration penalty in the sum of £59,718; the percentage of mitigation
allowed was 65 per cent. In a separate letter of the same date, Mrs Howes set
out the basis for the penalty. (We consider this at a later point in this
decision.)
37.
In a letter to Ms Colegrave dated 22 October 2010, Mr Gradwell referred
to the need to review an assessment dated 5 August 2010 made in respect of the
disallowance of £158,766 of VAT incurred in respect of development costs
relating to the Unity Mill project. He requested further information.
38.
On 28 October 2010, CHL gave Notice of Appeal to the Tribunals Service
against HMRC’s refusal to accept belated notification of the option to tax in
respect of Unity Mill. On 12 November 2010, CHL gave Notice of Appeal against
the misdeclaration penalty.
39.
On 24 November 2010 Ms Colegrave wrote to HMRC applying for C28 to be
included in the CHL VAT group with retrospective effect from 20 July 2007. She
set out the history of the transactions concerning Unity Mill, and indicated
that CHL was submitting the request on the basis that:
“(a) it has (acting as the representative member of
the VAT group, on behalf of CUK [ie CPUKL]) consistently acted since 30th
July 2007 in a manner consistent with its mistaken belief that C28 was already
included in its VAT group;
(b) had the application been made before rather than
after the transfer of property to C28, there would have been no grounds for
refusing the application;
(c) while unfortunate the omission to make the
application at the right time was solely due to an administrative slip-up such
as can occur in the best regulated organisation;
(d) no prejudice to the Revenue or loss of tax has
been caused by the delay in making the application to group;
(e) on the contrary, the belated inclusion of C28 in
the group will enable Copthorn Holdings to get its tax affairs in order;
(f) the potential loss of a tax windfall to HMRC is
not a relevant consideration.
We would be grateful if HMRC allow the retrospective
inclusion of C28 in the Copthorn Holdings VAT group, effective from 30 July
2007. This is right, sensible and in the interests of all parties.”
40.
On 9 December 2010 HMRC’s VAT Registration Service wrote to CHL to
inform it that its application dated 24 November had been refused. (The
relevant parts of this letter are set out in full later in this decision.) That
letter did not reach CHL, and following a letter from CHL dated 22 December
2010 indicating that no response to its application had been received, a copy
of the refusal letter was sent to CHL on 11 January 2011. As a result of a
further exchange of letters, HMRC confirmed that the period of 30 days for
requesting a review or appealing to an independent tribunal would run from 11
January 2011.
41.
On 7 February 2011 CHL gave Notice of Appeal to the Tribunals Service against
the decision by HMRC to refuse retrospective inclusion of C28 in the CHL VAT
group.
The facts relating to C26
42.
The Directors’ Report forming part of the Directors’ Report and Accounts
of C26 for the year ended 30 September 2008 states that C26 was incorporated on
29 March 2007. Its principal activity was stated to be that of property
development.
43.
On 8 October 2002, a company named Lakenmoor Ltd (“LL”), a subsidiary of
EH Booth & Co Ltd (“EHB”) opted to tax certain land and buildings off Queen Street, Preston. LL notified HMRC of the option on 24 October 2002.
44.
According to the Schedule to Mr Harcourt’s letter dated 28 April 2010
(see below), it was recorded in LL’s accounts for the period to 1 April 2006
that a contract had been signed to dispose of the company (ie LL itself) subject
to obtaining planning consent for the investment property. This statement was
repeated in LL’s accounts for the following year.
45.
On 14 April 2008 EHB opted to tax a further parcel of land at Queen Street (title LA664237).
46.
According to the above Directors’ Report, on 18 April 2008 C26 acquired
the total issued share capital in LL for £100 and a freehold interest in
various pieces of land off Queen Street, Preston owned by EHB for the sum of
£348,009 together with the freehold interest in land held by Maple Grove
Developments Ltd for £521,991. C26 also acquired a freehold interest in the
land held by LL for the price of £7,722,075. (A note to the accounts of LL
stating that the property had been transferred to C26 for nil consideration was
stated by Mr Sharp at a subsequent meeting with HMRC to be incorrect.) A note
to the Accounts of C26 to 30 September 2008 showed that C26 owed its subsidiary
£7,722,175.
47.
Mr Harcourt’s letter dated 28 April 2010 indicates that on 28 April
2008, LL was deregistered in its own right and joined the CHL VAT group.
Confirmation of LL’s commencement of membership of that group is also given in
the “Group Registration Record” sent with HMRC’s letter dated 17 June 2010.
48.
On 30 September 2008, Ms Colegrave wrote to Mrs Howes enclosing a
notification of option to tax in respect of land at Queen Street; the title
numbers were LA 923116, LA359177, LA837738, LA518072, LA760973 and LA518156.
The effective date of the option was 30 September 2008.
49.
On 28 April 2010, Mr Harcourt wrote to Mr Sharp in relation to the
interaction of C26 and LL. He referred to an earlier exchange between Mr Sharp
and Mrs Howes concerning LL’s activities for VAT purposes. As matters were not
clear, Mr Harcourt summarised the information available from the companies’
accounts and otherwise available to HMRC, and requested various additional
items of information.
50.
On 20 July 2010, Mrs Howes wrote to Mr Sharp, referring to earlier
correspondence concerning LL. Mr Sharp had stated, in a letter dated 25 March
2010, that LL had not made and did not intend to make any taxable supplies. Mrs
Howes set out her understanding of the position in relation to VAT. She
referred to a telephone conversation between Mr Harcourt and Mr Sharp on 16
July in which Mr Sharp had confirmed that there had been a supply of the
property by LL. She understood that a meeting had been arranged to discuss the
position. She set out her calculations of the output tax due. She was unable to
trace a VAT registration number for C26, and requested information concerning
its VAT position. In the absence of further information being provided, she
would assume agreement with her preliminary findings and might proceed to make
an assessment.
51.
A meeting took place on 12 August 2010 between Ms Colegrave, Mr Sharp
and Paul Hickey on behalf of the CHL Group and Mrs Howes, Mr Gradwell and Mr
Harcourt for HRMC. Mr Sharp provided information on a number of matters
concerning C26 and LL.
52.
On 29 September 2010, Mr Gradwell wrote to Mr Sharp enclosing a VAT
assessment against LL in the sum of £1,150,096 in respect of the sale by LL to
C26 of the freehold interest in the Queen Street land. He explained that, as LL
had been deregistered for VAT with effect from 28 April 2008, he had raised the
assessment by letter. He referred to possible interest, and also indicated that
LL might be liable to a misdeclaration penalty.
53.
Mr Sharp wrote to Mr Gradwell on 12 October 2010, making no reference to
the VAT assessment. He provided information in response to the letters from Mr
Harcourt and Mrs Howes, and to questions raised at the August meeting. In
relation to VAT, he indicated that C26 was not currently registered for VAT,
and that LL had been deregistered on 24 April 2008 and had been added to the
CHL group registration. When the tangible fixed assets had been transferred
from LL to C26, no output VAT had been charged, on the basis that the land was
not opted to tax. The information provided in Mrs Howes’ letter dated 20 July
2010, that the land had been opted to tax from 8 October 2002 (presumably by EHB),
had not been evident at the time when the CHL group had acquired the land. Mr
Sharp asked HMRC to verify which parcels of land had been opted to tax as at 18
April 2008. He indicated that an application to opt to tax the land had been
made by CPUKL and was effective from 30 September 2008 without the prior
knowledge of the land’s taxable status. He stated that it was the CHL VAT group’s
intention to apply for a belated registration for C26 at 18 April 2008 and also
to opt to tax the land on the basis that it would make taxable supplies in the
future.
54.
Mr Gradwell replied on 26 November 2010. He stated that two parcels of
land, LA 664237 and LA432345, had not been included in the CPUKL option made on
30 September 2008 or any other option held on file for that company. He
referred to the transfer of work in progress mentioned by Mr Sharp. This supply
was in the value of £2,226,311. However, Mr Sharp had stated that no VAT was
charged by CPUKL in respect of this transaction; an assessment to VAT at the
standard rate would be required. He referred to the position of LL, which as he
understood had sold the property on 18 April 2008 to C26. As LL had made an
election to tax the property, VAT should have been charged. He referred to the
assessment which he had made, and asked for confirmation of receipt. He stated
that two parcels of land, LA837738 and LA518072, had been included in the CPUKL
option but not in LL’s option on 8 October 2002. It appeared that VAT might have
been brought into account by the wrong entity, and therefore Mr Gradwell
indicated that he would need to consider this further.
55.
In his reply dated 27 January 2011, Mr Sharp stated that according to
CPUKL’s records, parcel LA 664237 had been opted to tax by EHB on 14 April
2008. He provided various items of information to Mr Gradwell.
56.
On 23 February 2011 Ms Colegrave wrote to HMRC requesting that they
should accept a belated application for C26 to be included in the CHL VAT group
with effect from 18 April 2008. She set out the history of C26. Due to an
administrative oversight, no application to include C26 in the VAT group had
been submitted. Following the acquisition of LL, it had transferred the Queen Street land, which had been opted to tax, to C26; no VAT had been charged on this
transfer. This position had been subject to an assessment by HMRC of VAT
underdeclared and the outstanding output VAT paid. In relation to land
purchased by C26 from EHB, one parcel of which had been opted to VAT by that
company, VAT had been charged to C26. In the mistaken belief that C26 was a
member of the CHL VAT group, that VAT had been recovered through the CHL VAT
group return. In November 2008, leases on the property had been assigned from
EHB and LL. No VAT had been charged on the assignment by LL, as it was at that
stage a member of the CHL VAT group (with effect from 28 April 2008), and the
assignment was assumed to be made between two members of the same VAT group. Ms
Colegrave referred to the option by the CHL VAT group made on 30 September
2008, on the assumption that the property was held by a member of that group.
57.
Based on that option, VAT was charged on the rental income received for
the opted portion of the property leased by C26, and this was shown in the
books of CPUKL, which Ms Colegrave described as the representative member of
the CHL VAT group. The legal and beneficial interest in the work in progress on
the property had also been transferred from CPUKL to C26; again, no VAT had
been accounted for on this transaction, as it was assumed to be an intra-group
supply. Ms Colegrave explained that in order to rectify the VAT registration
status of C26, she wished to submit a belated application to include C26 in the
CHL VAT group with effect from 18 April 2008. She set out various arguments in
support of the application; as these matters were the subject of submissions by
both parties, we do not set them out here.
58.
On 8 March 2011 HMRC’s VAT Registration Service replied, refusing the
application. The letter was in similar terms to the letter dated 9 December
2010 concerning C28, but was written by a different officer. (We consider both the
C26 and C28 letters below.)
59.
On 30 March 2011, CHL gave Notice of Appeal to the Tribunals Service
against HMRC’s decision to refuse to allow the application to include C26 to be
included in the CHL VAT group with retrospective effect.
Arguments for CHL
60.
Mr Southern submitted that underlying all four appeals was the same
essential point, namely refusal to allow group membership with retrospective
effect. The question raised was, what were the consequences of the
transactions? Did the taxable group suffer an irrecoverable VAT charge (as HMRC
argued)? Or was the problem capable of resolution? Indeed, having regard to
regulation 111 of the VAT (General) Regulations (SI 1995/2518) (“the
Regulations”), need there be a problem at all?
61.
The essential question before the Tribunal was this: where there has
been an innocent administrative oversight, does the law – interpreted in the
light of the public interest, ie what is reasonable – require the damage to be
reparable or irreparable? Administrative mistakes were regrettable, but they
did occur. Specifically, should HMRC admit the two companies concerned to the
CHL VAT group with retrospective effect? If the answer to this question was
“Yes”, all the costs, legal issues and complications would disappear at the
stroke of a pen. This would produce a sensible commercial result. It would also
accord with EU law. CHL’s essential submission was that this outcome would best
accord with the will of Parliament.
62.
In the context of the neutrality principle, Mr Southern referred to the
nature of the business carried on by the CHL VAT group. Its core business was
that of housing; in principle, it was making wholly taxable supplies. It should
not, therefore, be incurring VAT as an economic cost. The effect of the events
which had occurred was to produce a large VAT charge which the CHL VAT group
would not otherwise have had to bear.
The C28 issues (the First, Second and Third Appeals)
63.
In relation to Unity Mill, the basis of the Preferred Assessment was
that the supply by CPUKL to C28 was exempt, and accordingly the input tax which
had been claimed and recovered as a result of the CHL group’s VAT returns for
July 2007 and December 2007 was wholly irrecoverable. The Alternative
Assessment was on the basis that the option to tax had been exercised and late
notification allowed, and that in consequence, output tax should have been
accounted for on the transfer from CPUKL to C28. The Alternative Assessment had
been cancelled but then reissued. The reissued Alternative Assessment might
therefore be out of time.
64.
If the relevant part of the First Appeal (against HMRC’s refusal to
accept late notification of the option) were to be allowed, there would have
been a taxable supply by CPUKL to C28, in which case the output tax charged by
the Alternative Assessment (if it was valid) would have been due.
65.
However, C28 could then register separately for VAT in order to recover
input tax charged to it, rendering both the Preferred Assessment and the
Alternative Assessment pointless.
66.
If C28 had been a member of the CHL VAT group, it would have been
irrelevant whether or not the option to tax had been exercised or, if
exercised, notified within the specified period.
67.
If the Third Appeal was allowed, it would follow that CHL rightly
recovered the VAT and no output tax was due. Nor would any VAT have been
misdeclared.
68.
The difficulties had arisen because two mistaken and related assumptions
had been made in July 2007. The first assumption was that C28 was a member of
the CHL VAT group (“the grouping assumption”). The second was that CPUKL had
exercised and notified the option to tax in respect of Unity Mill, but by
reason of the grouping assumption this was a secondary matter.
69.
There was a further possibility. The property had been acquired by CPUKL
and immediately transferred on to C28. CPUKL never acquired any beneficial
interest in the property. In conveyancing terms, it was simply a conduit. There
had been a taxable sale by Tetrosyl to C28. C28 had to pay the input tax, but
could recover it by registering for VAT.
70.
Yet another possibility was that because CPUKL had never been paid by
C28, C28 simply held the property on a purchase money resulting trust (referred
to in Megarry & Wade, The Law of Real Property, p 415).The VAT treatment
would then have been correct.
71.
These possibilities had not been argued or taken further on the
principle: why make things complicated if they could be made simple? (These and
other possibilities referred to by Mr Southern are considered later in this
decision.)
72.
The same principle applied to the putative separate VAT registration of
C28. Mr Southern referred to regulation 111 of the Regulations. This provided a
complete code for the recovery of pre-registration input tax. It was a
sufficient basis for C28 to make an input tax claim in respect of input tax
which it incurred on the acquisition of Unity Mill. All the pre-conditions were
satisfied. The provision expressed an underlying principle of recoverability of
input VAT by persons making taxable supplies.
73.
The provision had not yet been explored, because it was not the
commercially sensible structure for the CHL Group’s business. If these appeals
were unsuccessful, it would be the Group’s next step. However, the fact that
this possibility was open to the Group suggested that it would be sensible if
the law could offer a simpler route to the same outcome.
74.
On the issue of grouping with retrospective effect, CPUKL was a member
of the CHL VAT group. If C28 had been a member of the CHL VAT group (and not
simply a member of the CHL corporate group), the transfer of the land by CPUKL
to C28 on 30 July 2007 would have been disregarded. The input tax paid on the
purchase price could have been attributed to the taxable supplies of the CHL
VAT group as a whole, and so would have been recoverable. If C28 could be
grouped retrospectively, then all the difficulties would disappear at a stroke.
It would make no difference which member of the CHL VAT group acquired Unity
Mill, because for VAT purposes all acquisitions from and supplies to third
parties were treated as made by CHL.
75.
CHL had accordingly made an application under s 43B(2)(a), (b) for C28
to be treated as a member of the CHL VAT group with effect from 30 July 2007.
HMRC’s refusal to accede to this request had given rise to the third appeal.
HMRC had identified three obstacles to acceding to this request. (We examine
these below, together with Mr Southern’s detailed submissions relating to
HMRC’s refusal of the application.)
76.
Mr Southern also made detailed submissions concerning the First Appeal.
As these submissions raised questions both of law and fact, we consider them
later in this decision.
77.
The Second Appeal (against the misdeclaration penalty) would only be relevant
if:
(1)
the Third Appeal and the First Appeal were to fail in their entirety; or
(2)
the Third Appeal were to fail, the First Appeal were to succeed as
regards the Preferred Assessment but to fail as regards the Alternative Assessment.
78.
Mr Southern made submissions concerning the extent to which the CHL VAT
group would be punished in such circumstances without the additional burden of
the misdeclaration penalty; as these submissions were of a factual nature, we
return to these later.
The C26 issues (The Fourth Appeal)
79.
In relation to the Fourth Appeal, the same erroneous grouping assumption
had been made in relation to C26 as had been made concerning C28. The same
principles of law applied, and CHL relied on the same arguments.
Arguments for HMRC
The C28 issues (the First, Second and Third Appeals)
80.
Mr Zwart made a number of submissions concerning C28, which we summarise
as follows:
(1)
HMRC had been entitled to decide as they had in relation to the group
election;
(2)
HMRC had applied Parliament’s scheme (concerning group registration)
reasonably on available evidence;
(3)
HMRC had fairly applied penalty mitigation;
(4)
There was no evidence that C28 itself, which at the relevant time was
not a member of the CHL VAT group, had actually made a waiver of exemption in
respect of Unity Mill at any point up to the end of the requisite period for
notification;
(5)
The First, Second and Third Appeals should be dismissed with costs.
81.
As Mr Zwart’s submissions involved detailed questions both of fact and
law, we find it more convenient to deal with these together with Mr Southern’s
submissions in the “Discussion and Conclusions” section of this decision.
The C26 issues (The Fourth Appeal)
82.
In summary, Mr Zwart’s submissions relating to C26 were:
(1)
HMRC had been entitled to decide as they had done in refusing to
backdate the group registration of C26;
(2)
HMRC had concluded reasonably on the available evidence that exceptional
circumstances had not arisen;
(3)
The Tribunal did not have jurisdiction in respect of a refusal by HMRC
to backdate a group registration;
(4)
The Fourth Appeal should be dismissed with costs.
83.
Again, for the reasons set out in paragraph 81 above, we deal with these
submissions below.
Discussion and conclusions
HMRC’s “conscious process” allegations
84.
As a preliminary and general matter, we find it necessary to deal first
with HMRC’s description in argument of the CHL Group’s thought process in
relation to the group registration issues and the “option to tax”.
85.
In each of Mr Zwart’s skeleton arguments relating respectively to C28
and to C26, he stated:
“CHL’s complaint distils to re-writing its VAT
history – to achieve for it a more ‘commercial result’ – so as to avoid the
fiscal consequences of its particular corporate (and taxation) approach. This
does not qualify as ‘most exceptional circumstances’.”
86.
As the word “most” in the latter sentence is derived from a passage in
HMRC’s VAT Manual which was not inserted until 2012, and which Mr Zwart
accepted should be deleted from his skeleton argument for that reason, we treat
that sentence as referring merely to “exceptional circumstances”, being the
expression used in HMRC’s published guidance available at the times of the
respective applications by the CHL VAT group.
87.
In referring to Ms Colegrave’s letter dated 24 November 2010 to HMRC
enclosing the application for group registration for C28, Mr Zwart submitted
that, rather than seeking (by belated inclusion of C28 in the CHL VAT group) to
enable CHL to get its tax affairs in order, CHL was attempting not to rectify but
to rewrite the VAT supply history as a commercial preference ex post facto. At
a later stage, in summarising the argument in order to enable Mr Southern to
note it down, Mr Zwart’s description of the thought process appeared to imply
that the CHL group had in some way deliberately held back on the group
registration issue and had only decided later to pursue applications in the
light of commercial circumstances subsequently prevailing, including the impact
of the “credit crunch”.
88.
At a later stage, Mr Zwart stated HMRC’s view that there had been a
supply in each case, and that VAT was properly due; this was the
contemporaneous result of CHL’s choices. Rather than a problem needing to be
rectified, it was a problem which ex post facto was sought to be rewritten. It
was difficult to see the relevant group registration statutory provision being
used as a “commercial parachute” to cure the consequences of the CHL Group’s
commercial decisions ex post facto. CHL’s argument was that it was rectifying
the problem; HMRC’s view was that CHL was trying to rewrite the position, as it
was uncomfortable with the commercial consequences.
89.
In summarising his arguments on both sets of appeals, Mr Zwart concluded
that in relation to C28 there had been a simple supply chain and that VAT was
due; the position in relation to C26 was the same. In both cases the credit
crunch had intervened; CHL sought to cure the position by rectification, which
HMRC considered to amount to rewriting the supply history.
90.
At the beginning of his reply, Mr Southern described this argument as
“novel”, not having been included in HMRC’s Statement of Case or in its
skeleton arguments. It carried implications which may not have been intended,
but were disturbing. Mr Southern read out a note which he had taken of the
summary of this HMRC argument given the previous day by Mr Zwart.
91.
Mr Southern commented that, in short, HMRC were asserting deliberate
acts and saying that CHL was now trying to rewrite history. None of this had
previously been pleaded, either in HMRC’s Statement of Case or in their
skeleton arguments. None of these points had been put to Ms Colegrave when she
gave her evidence.
92.
The first (and less important) point was that CHL should not be ambushed
in this way; this was procedurally unfair to CHL.
93.
Secondly, and more importantly, the whole of CHL’s case was premised on
mistake. Both in correspondence and in her evidence before the Tribunal, Ms
Colegrave had stated that it had been administrative oversights and
administrative mistakes which had been the cause of the unforeseen VAT
liabilities. The novel argument for HMRC was tantamount to accusing Ms Colegrave
of fraud. HMRC were entitled to do so if:
(1)
this was pleaded in detail in advance;
(2)
there was cogent evidence to support the accusation;
(3)
the accusation was put to the witness in cross-examination.
94.
In the present case, no such accusation had been pleaded, no evidence
had been cited to support such a contention, and Ms Colegrave’s evidence was
undisputed.
95.
In fairness, this HMRC thesis was inconsistent with other submissions
made by Mr Zwart, in which he had referred to “errors”, “riding two horses”,
and so on. However, the words involving the new contention had been spoken. Mr
Southern submitted that HMRC had disentitled themselves from putting forward
the arguments which they had done; there had been abuse of process on a grand
scale. The appeals should simply be allowed.
96.
Our view after hearing the latter submission from Mr Southern was that
if any allegation of fraud had been made, this should simply be “carved out”
from the matters before the Tribunal and put aside so that it could be ignored
in reaching decisions on the appeals. Mr Southern responded that he had had to
make the point in order to represent CHL properly, and out of deference to Ms Colegrave,
whose integrity had been impugned.
97.
Mr Zwart responded to Mr Southern’s argument. It had been said that HMRC
had alleged fraud, but the word which Mr Southern had used was “tantamount”. Mr
Zwart stated that, in putting HMRC’s arguments, he had expressly spelt out to
the Tribunal that there was no such element. HMRC were not alleging fraud. HMRC
had tested the position, and it was clear that there were gaps in the
explanation. The explanations had appeared unclear due to the muddle going on
at the time. HMRC did not allege fraud, and had never done so.
98.
In relation to notice of the position, Mr Zwart submitted that reference
had been made to the argument in HMRC’s Consolidated Statement of Case. He had
cross-examined Ms Colegrave on this issue. There had not been a procedural
ambush. The summary put to the Tribunal had been his own summary as to what was
going on commercially. He hoped this clarified the position and showed that
there had been no allegation of fraud.
99.
This was all a matter of evidence, how far one could infer or not from
that evidence. He did not wish HMRC’s position to be misinterpreted. He had
made no suggestion of deception. He had highlighted the absence of a “paper
trail” in putting points to Ms Colegrave, as there were gaps in what had
occurred. He did not understand the credibility of Ms Colegrave’s evidence to
have been in issue. It had been unclear, from the lack of documents, as to what
had occurred.
100. Mr Southern made
two further points in response. First, it was common ground between the parties
that the process had started off with genuine mistakes, ie administrative
oversights. This was what Ms Colegrave had referred to in correspondence and in
her evidence. Secondly, the implications of the points put by HMRC may not have
been intended, but references had been made to “rewriting history”. This was a
very, very dangerous phrase. As soon as those words were used, the user was
alleging deceit.
Conclusions on the “conscious process” issue
101. Our view as
expressed to the parties at the hearing was that it was for us to examine the
evidence and to reach our own conclusions concerning the state of mind of the
persons involved on the CHL Group’s behalf. It was neither appropriate nor
necessary for us to arrive at any such conclusions during the course of the
hearing. We therefore continued to hear Mr Southern’s reply submissions.
102. Having
considered the issue since the hearing, our conclusion is that it is
inconsistent with the evidence to suggest that any conscious thought process
was involved. We deal in detail below with our findings of fact concerning the
matters relevant to all the appeals, and our overall view on the basis of all
the evidence is that we are satisfied that the chaotic results were the product
of omission and inadvertence. We would describe the apparent implications of HMRC’s
argument as being an ex post facto rationalisation of a series of unconnected
events, not justified by the evidence. Ms Colegrave’s credibility as a witness
was not impugned, and we take her evidence at face value. We have therefore
considered the issues raised by the appeals without taking any further account
of HMRC’s suggestion that any of the actions or omissions in question may have
been intentional. Both Ms Colegrave’s evidence and the documentary evidence
support the conclusion that the failures to take appropriate action were the
result of inadvertence. For the record, we do not consider that the reference
in HMRC’s Consolidated Statement of Case relied on by Mr Zwart as giving notice
of the argument is a sufficiently clear indication of the nature of the
argument. Although his two skeleton arguments contain the words set out at
paragraph 85 above, we do not consider that those words contain any suggestion
that there may have been any consideration of the implications in the light of
changes in prevailing commercial circumstances before the group registration
applications were prepared and lodged.
103.
One of the cases cited in Mr Zwart’s skeleton argument relating to C28
is Marlow Gardner & Cooke (Directors Pension Scheme) v HM Revenue and
Customs [2006] EWHC 1612 (Ch), [2006] STC 2014. This concerned the option
to tax (as it stood under the legislation applicable before the 2006 VAT
Directive). At [26], when considering the effect of the option to tax legislation,
Mann J acknowledged that it inevitably built in “an element of retrospection
(if that is the right word)”. From Mann J’s comments, we derive the broader conclusion
that the consequences of taking certain actions pursuant to VAT legislation may
well be to amend, with retrospective effect, the VAT position which previously
applied and would otherwise have continued. We do not consider it appropriate
to conclude, merely because there is “an element of retrospection”, that any
adverse or negative motivations should be attributed to the taxable person
seeking the amended VAT position. In Marlow Gardner & Cooke, the
relevant VAT legislation resulting in an adjustment of the VAT position was
held to apply; in the particular circumstances, this was viewed by the
appellant as being to its detriment. In our view, a taxable person should not
be criticised for seeking application of VAT legislation which would have the
effect of adjusting the VAT position to that taxable person’s advantage, or (as
contended here by CHL) to eliminate liabilities to VAT which would not have
arisen in the event that certain steps had been taken at the points when they had
implicitly and erroneously been assumed to have been taken.
The group registration issue
104. As the issues
raised by the Third Appeal and the Fourth Appeal are the same, we deal with
both together. We deal first with the various questions of law concerning this
issue, and then consider the facts as appropriate in the light of our
conclusions on the law.
105. Under s 43(1) of
the Value Added Tax Act 1994 (“VATA 1994”):
“(1) Where under sections 43A to 43D any bodies
corporate are treated as members of a group, any business carried on by a
member of the group shall be treated as carried on by the representative
member, and—
(a) any supply of goods or services by a member
of the group to another member of the group shall be disregarded . . .”
106. Section 43B VATA
1994 deals with applications in relation to VAT groups. The following
provisions of s 43B are relevant here:
“(2) This section also applies where two or more
bodies corporate are treated as members of a group and an application is made
to the Commissioners—
(a) for another body corporate, which is
eligible by virtue of section 43A to be treated as a member of the group,
to be treated as a member of the group . . .
(4) Where this section applies in relation to an
application, it shall, subject to subsection (6) below, be taken to be granted
with effect from—
(a) the day on which the application is received
by the Commissioners, or
(b) such earlier or later time as the
Commissioners may allow.
(5) The Commissioners may refuse an application,
within the period of 90 days starting with the day on which it was received by
them, if it appears to them—
. . .
(c) in any case, that refusal of the application
is necessary for the protection of the revenue.
(6) If the Commissioners refuse an application it
shall be taken never to have been granted.”
107. Although the
content of the relevant letters may appear to be an issue of fact, it is
necessary at this point (for reasons which will become apparent below) to set
out the main part of the text of the respective HMRC letters to CHL dated 9
December 2010 and 8 March 2011 refusing the applications relating to C28 and
C26 respectively:
“Further to your application dated 24/11/10
in respect of Countryside 28 Limited.
I have to advise you that your request that your
company be treated, together with the other associated companies listed on
forms VAT 50 & 51 has been refused.
The reason for this refusal is as per VAT Notice
700/2.
‘2.14 Can I backdate my application for
more than 30 days?
Only in exceptional circumstances:
if we lose your application and you can supply
details of your original application and your attempts to follow it up; or
if the delay was caused by lack of action on our
part.’
Under the provisions of the VAT Act 1994, section
43B(6) your application is to be treated as if it were never made and we must
return you to your VAT status at the time your application was made.
If your have any further information that you want
me to consider, please send it to me now.
If you do not agree with my decision, you can
·
ask for my decision to be reviewed by an HMRC officer not
previously involved in the matter, or
·
appeal to an independent tribunal
If you opt for a review you can still appeal to the
tribunal after the review has finished.
If you want a review you should write to [name/team]
at [address] within 30 days of the date of this letter, giving your reasons why
you do not agree with my decision We will not take any action to collect the
disputed tax while the review of the decision is being carried out.
If you want to appeal to the tribunal . . .”
“Further to your application dated 24/11/10
in respect of Countryside 26 Limited (6193011).
I have to advise you that your request that your
company be treated, together with the other associated companies listed on
forms VAT 50 & 51 has been refused.
The reason for this refusal is as per VAT Notice
700/2.
‘2.14 Can I backdate my application for
more than 30 days?
Only in exceptional circumstances:
if we lose your application and you can supply
details of your original application and your attempts to follow it up; or
if the delay was caused by lack of action on our
part.’
Under the provisions of the VAT Act 1994, section
43B(6) your application is to be treated as if it were never made and we must
return you to your VAT status at the time your application was made.
If your have any further information that you want
me to consider, please send it to me now.
If you do not agree with my decision, you can
·
ask for my decision to be reviewed by an HMRC officer not
previously involved in the matter, or
·
appeal to an independent tribunal
If you opt for a review you can still appeal to the
tribunal after the review has finished.
If you want a review you should write to [name/team]
at [address] within 30 days of the date of this letter, giving your reasons why
you do not agree with my decision We will not take any action to collect the
disputed tax while the review of the decision is being carried out.
If you want to appeal to the tribunal . . .”
108. It is clear from
these two extracts that (as Mr Southern submitted) the letters were in
identical terms, other than their dates and the companies to which they
related. Further differences were that the signatories were not the same, the
first being signed “Yours faithfully” by HMRC Officer Andrew Milner, and the
second being signed “Yours sincerely” by HMRC Officer Mrs J King.
109. As indicated
above, Mr Southern submitted that the difficulties in relation to C28 and C26
could be solved easily if HMRC were to accept the applications for inclusion of
those companies within the CHL VAT group with effect from the dates referred to
in the respective applications. HMRC had raised three obstacles to this course.
The first was that the discretion conferred on HMRC by s 43B(4) VATA 1994 was
“pure” rather than limited and thus unappealable. The second was that the
position did not fall within the terms of HMRC’s published guidance. The third
was the discretion provided to HMRC under s 43B(5) VATA 1994 to refuse an
application “. . . for the protection of the revenue”.
110. As a finding
that the Tribunal had no jurisdiction would have the effect of preventing us
from considering the issues concerning the refusal of the group registration
applications in respect of C28 and C26, and instead would require us to strike
out the Third and Fourth Appeals, we deal first with the jurisdiction issue.
(a) Submissions
on the jurisdiction issue
111. Mr Zwart made
the following submissions concerning the Tribunal’s jurisdiction in relation to
s 43B(4) VATA 1994. Section 83 VATA 1994 sets out the matters with respect to
which an appeal shall lie to the tribunal. Section 83(1)(k) states that an
appeal lies in respect of:
“the refusal of an application such as is mentioned
in section 43B(1) or (2)”
Section 43B(5) VATA 1994, under which HMRC could refuse
an application, appeared on the face of s 83(1)(k) to be within the Tribunal’s
jurisdiction. However, s 43B(4) did not use the term “refusal”. Mr Zwart
submitted that the exercise of HMRC’s discretion engendered a refusal in
relation to the granting of an application with effect from an earlier or later
time, but this was all that s 43B(4) did.
112. Although HMRC submitted
in their Statements of Case that the discretion in s 43B(4) VATA 1994 was a
pure discretion and that in consequence the Tribunal had no jurisdiction to
entertain the Third and Fourth Appeals, Mr Zwart made no further submissions to
support this contention.
113. Mr Zwart
referred to University of Essex v Revenue and Customs
Commissioners [2010] UKFTT 162 (TC), TC00467 at paragraph 50 onwards. He
submitted that the Tribunal in that case had not given an explanation of its
reasoning in relation to s 43B(4)(b) VATA 1994.The question in the present case
was whether the scope of s 83(1)(k) VATA 1994 embraced a refusal engendered by
a refusal on HMRC’s part to exercise their discretion under s 43B(4)(b) in
favour of the CHL VAT group. If this was the case, the University of Essex case gave guidance as to the content of the appellate jurisdiction.
114. Mr Southern
responded on the jurisdiction issue. The High Court had held in Customs and
Excise Commissioners v Save & Prosper Group Ltd [1979] STC 205 that the
right of appeal under the previously applicable legislation extended to the
refusal to accept an application for retrospective grouping. The submission for
HMRC appeared to suggest that the wording in the current legislation had
reversed the conclusion of the High Court in Save & Prosper. This
suggestion was fundamentally improbable. The simple answer was that ‘refusal’
was dealt with in s 43B(6), so that must be within the scope of s 83(1)(k), and
the provisions relating to applications were in s 43B(3)-(5), so the reference
to ‘application’ also brought in those sub-sections. If there was no right of
appeal, he questioned why the Third and Fourth appeals were being heard.
(b) Conclusions
on the jurisdiction issue
115. We deal with the
respective submissions made by each party. If Mr Zwart’s submissions as to
jurisdiction were to be accepted, this would appear to preclude this Tribunal,
or any other, from considering the exercise of HMRC’s discretion in relation to
applications for group registration with retrospective effect. (For
convenience, we refer to the latter as “retrospective” applications.) That
conclusion might not leave an applicant without a remedy, but any such remedy
would not be available through the First-tier Tribunal. As these submissions for
HMRC call into question the conclusion of the Tribunal in University of
Essex, as well as the judgment of Neill J in Save and Prosper, we treat
them with caution. Further, if HMRC’s view was that the Tribunal did not have
jurisdiction, the proper procedure would have been for HMRC to apply at a much
earlier stage for the Third and Fourth Appeals to be struck out under Rule 8(2)
of the Tribunal Rules, rather than allowing them to reach the stage of a
substantive hearing. We therefore agree with the criticism implicit in Mr
Southern’s question.
116. We accept Mr
Southern’s submission as to the inherent improbability of a change of law in
respect of the issues considered in Save & Prosper as a result of
the changes made to the later consolidated version of the legislation by Schedule
2 to the Finance Act 1999. That Schedule inserted ss 43A, 43B and 43C into VATA
1994, substituted s 83(1)(k), and inserted s 84(4A)-(4D). It appears that one
effect of the changes is to give HMRC a wider (or “open”) form of discretion in
relation to the consideration of a “retrospective” application. In various
respects the former legislation precluded the Commissioners of Customs and
Excise from refusing an application unless it appeared to them to be necessary
to do so for the protection of the revenue. The original version of what is now
s 83(1)(k) permitted an appeal with respect to any refusal of an application
under s 43 VATA 1994 in its original form. If Parliament had intended to place
restrictions on the Tribunal’s jurisdiction in respect of the wider discretion,
we would have expected this to be made clear by the changes to the legislation.
117. In Save and
Prosper at 209, Neill J dealt with the issue of jurisdiction as follows:
“It seems to me that a decision by the commissioners
that they had no jurisdiction to entertain the application submitted to them
constituted a refusal for the purpose of s 40(1)(g). That paragraph gives the
right to an appellant to appeal against the tribunal's findings with respect
to: 'any refusal of an application under section 21 of this Act'. I am
therefore satisfied that this appeal is properly before this court.”
118. Thus it was not
considered necessary for the Commissioners to express their decision in terms
of a “refusal” in order for that decision to be treated for jurisdiction
purposes as amounting to a refusal.
119. In that context,
we respectfully agree with the comments of the Tribunal in University of
Essex at paragraph 51, referring to paragraph 50. The Tribunal commented:
“By refusing to agree to the back-dating HMRC was
refusing the application that had been made. That refusal is a refusal falling
within section 83(k). It follows that the Tribunal has jurisdiction in respect
of the second issue.”
120. We also see some
force in Mr Southern’s submissions concerning the use of the words “refuse an
application” in s 43B(6) VATA 1994. Section 43B(4) expresses itself to be
“subject to subsection (6) below”. All that s 43B(6) does is to state that if
HMRC refuse an application, it shall be taken never to have been granted.
Although (as examined below in relation to HMRC’s discretion) there is a degree
of inconsistency as between the remaining wording of s 43B(4) and the idea of
“refusal” of an application, it is arguable that there would be no reason to
include the reference to s 43B(6) if the proper construction of s 43B(4) was
that a decision by HMRC not to exercise its discretion to grant an application
with retrospective effect did not amount to the refusal of an application.
121. Additionally, we
consider that a submission set out in Mr Southern’s skeleton argument (and
further mentioned in his opening) supports CHL’s contention that the Tribunal
has jurisdiction. Section 83(1)(k) VATA 1994 refers to “the refusal of an
application such as is mentioned in section 43B(1) or (2)”. As a matter of
language, these words take in other matters mentioned in s 43B. Sub-sections 43B(1)
and (2) respectively use the introductory words: “This section applies . . .”
and “This section also applies”. Thus these sub-sections encompass everything
else contained in the section. In particular, s 43B(4) begins with the words:
“Where this section applies in relation to an application . . .” If the whole
of the section applies in respect of s 43B(4), s 43B(2) applies in the
particular circumstances of CHL’s applications in respect of C28 and C26, and
consequently the Tribunal has jurisdiction pursuant to s 83(1)(k) VAT 1994.
(The nature of that jurisdiction is considered below.)
122. Even if we were held
to be incorrect in our above conclusions concerning the construction of the
legislation in its current form, we consider that we do have jurisdiction in
the present case, as a result of the terms of the two letters from HMRC (as set
out at paragraph 107 above). Each is expressed in terms of a “blanket” refusal
of the application, rather than being couched in terms of a decision by HMRC not
to exercise their discretion to permit an application to be granted with effect
from a date earlier than that on which they received the application in
question. Although the letters make reference to the refusal as being “per VAT
Notice 700/2”, they make no reference to the exercise of HMRC’s discretion
under s 43B(4)(b) VATA 1994. CHL’s Third and Fourth Appeals therefore relate,
in each case, to “the refusal of such an application such as is mentioned in
section 43B(1) or (2)”, and so fall clearly within the jurisdiction conferred
by s 83(1)(k) VATA 1994.
123. In arriving at
the latter conclusion, we have taken into account the argument set out in
HMRC’s Statements of Case relating respectively to C28 and C26 that in
substance the appeals in respect of the group registration applications were
not appeals in respect of the refusal of applications for group membership, but
were appeals in respect of the refusal of group membership – which in each case
had subsequently been granted with effect from subsequent dates – to have
retrospective effect. We do not consider that the question of jurisdiction
should be determined by reference to any group registration applications which
may have been made after the respective dates on which HMRC made their
decisions in respect of the original group registration applications.
124. We consider that
there is a significant distinction between a decision by HMRC not to exercise
the discretion under s 43B(4)(b) VATA 1994, and refusing the application
altogether. If HMRC had said that they accepted the applications but had
decided not to exercise their discretion to permit them to take effect
retrospectively, the position would arguably have been markedly different. On
the hypothesis that our conclusions relating to jurisdiction, including our
endorsement of the views set out in Save and Prosper and University
of Essex, might be held to be incorrect, a decision by HMRC expressed in
that form would have left open the question of the extent to which such a
decision could be questioned through the Tribunal. As the Third and Fourth
Appeals do not on their facts directly raise that question, we think it better
for the issue to be left to be resolved at some future stage in the context of
other parties’ appeals.
125. A further issue
is that difficult questions are raised by the form of HMRC’s refusal, because
of the different appeal regime for “protection of the revenue” refusals. We
consider this below in the context of the nature of our jurisdiction.
126. If HMRC argue
that they are entitled to refuse an application on the basis solely of s
43B(4)(b), the inevitable consequence is that they must accept that the
Tribunal has jurisdiction pursuant to s 83(k) VATA 1994 in respect of an appeal
against HMRC’s decision. The use of what appear to be standard form letters
indicating that applications have “been refused” suggests to us that hitherto
HMRC have not considered that there was any distinction between a refusal in
relation to granting an application with effect from an earlier time and a
refusal of an application, despite Mr Zwart’s submission to the contrary
effect. If HMRC themselves construe the legislation as permitting them to
refuse an application, they can hardly seek to argue that the Tribunal has no
jurisdiction to consider the refusal.
(c) Nature of
Tribunal’s jurisdiction
127. Mr Southern
submitted that the powers of the Tribunal were as set out by Neill LJ in John
Dee Ltd v Customs and Excise Commrs [1995] STC 941 at 952f-g. The powers
depended on the nature of the appeal. In the case of group registrations, the
Tribunal had no power to substitute its own decision. It could make a finding
that powers had not been exercised lawfully by HMRC, and direct that HMRC
should reconsider the matter in the light of the Tribunal’s view of the law. It
was possible that after reconsidering the matter HMRC might still come back
with the same answer.
128. Mr Zwart argued
that, if the Tribunal did have jurisdiction, it was clear from Save &
Prosper that the role of the Tribunal was one of review only. Guidance to
the jurisdiction in relation to s 43B(4)(b) VATA 1994 was given by University of Essex.
129. In HMRC’s
Statements of Case, they submitted that if the Tribunal were to take the view
that it had jurisdiction to entertain the Third and Fourth Appeals, and were to
consider that in refusing to allow retrospective group membership HMRC had
failed to take account of all relevant considerations, the Tribunal would not
be entitled to do more than remit the matter to HMRC with guidance that they
should reconsider the applications in the light of the CHL VAT group’s specific
circumstances. They further submitted that the Tribunal’s jurisdiction could be
no wider than its jurisdiction pursuant to s 84(4A)(a) VATA 1994 to allow
appeals against the refusal of applications for group registration. The
Tribunal could only allow the appeals if it considered that HMRC could not
reasonably have been satisfied that there were grounds for refusing the
application. This conclusion followed from the fact that the discretion in s
43B(4) VATA 1994 was necessarily wider than that in s 43B(5), and Parliament
could not be taken to have intended that the Tribunal should have wider
jurisdiction in relation to a pure discretion than it had in relation to a
limited discretion.
130. Our view is that
the nature of the Tribunal’s jurisdiction in relation to s 43B(4)(b) VATA 1994
is as set out by Neill LJ in John Dee in the passage cited by Mr
Southern:
“In examining whether that statutory condition is
satisfied the tribunal will, to adopt the language of Lord Lane, consider
whether the commissioners had acted in a way in which no reasonable panel of
commissioners could have acted or whether they had taken into account some
irrelevant matter or had disregarded something to which they should have given
weight. The tribunal may also have to consider whether the commissioners have
erred on a point of law.”
131. In University of Essex at paragraph 54, the Tribunal described as follows the
further implications of the judgment of the Court of Appeal in John Dee:
“Nevertheless, even in a case where it was shown
that the commissioners’ decision was erroneous because of their failure to take
relevant material into account, a tribunal could nevertheless dismiss an appeal
if the decision would inevitably have been the same had account been taken of
the additional material.”
132. A complication
in relation to the nature of the Tribunal’s jurisdiction has been added by the
reference in arguments to “the protection of the revenue”. That appears to bring
in s 43B(5)(c) VATA 1994, in relation to which specific provision is made in s
84(4A) VATA 1994:
“(4A) Where an appeal is brought against the refusal
of an application such as is mentioned in section 43B(1) or (2) on the grounds
stated in section 43B(5)(c)—
(a) the tribunal shall not allow the appeal
unless it considers that HMRC could not reasonably have been satisfied that
there were grounds for refusing the application,
(b) the refusal shall have effect pending the
determination of the appeal, and
(c) if the appeal is allowed, the refusal shall
be deemed not to have occurred.”
133. If it were
appropriate to treat the refusals of the applications as being on such grounds
(a matter on which we comment below), the powers of the Tribunal pursuant to s
84(4A) are not identical to those in relation to s 43B(4) VATA 1994. The result
of a tribunal concluding that HMRC could not reasonably have been satisfied
that there were reasonable grounds under s 43(5)(c) for refusing the application
is that the refusal is cancelled with retrospective effect following the
successful appeal, thus in effect granting the application previously refused
by HMRC.
134. In contrast, a tribunal’s
powers in relation to s 43B(4) are more limited; if it considers that the
decision arrived at by HMRC is defective for any of the reasons specified in
the above passage from Neill LJ’s judgment in John Dee, and that it
cannot be shown that the factor wrongly taken into, or left out of, account did
not influence the mind of the decision maker, it may direct that HMRC should
reconsider the matter in the light of the tribunal’s view of the law and the
relevant findings by the tribunal in respect of the facts. In other words, putting
aside the “protection of the revenue” issue, it is not within the powers of
this Tribunal to direct that the “retrospective” group registration
applications made by CHL should be granted; the power and responsibility in
respect of that decision remains with HMRC.
(d) The
parties’ submissions on legal issues relating to HMRC’s discretion
135. Mr Southern questioned
whether HMRC had exercised their discretion. (We consider below his submissions
on the factual aspects of this question.) He submitted that the law gave HMRC
power to allow retrospective grouping without limitation of time. HMRC could
not deprive themselves of that power by imposing such severe restrictions as to
its exercise as to make its existence illusory.
136. There was no
time limit whatsoever in the legislation for an application for group registration
with retrospective effect. This was clear from the High Court’s decision in Save
& Prosper. Mr Southern commented in relation to University of Essex
that HMRC had not relied in that case on the “exceptional circumstances”
argument, whereas it was a centrepiece of the argument in the present case. If
Parliament had seen fit to insert a time limit, it would have done so.
Parliament often gave guidance in the legislation as to how a particular
discretion was to be exercised. Section 43B(5) specified limited circumstances
in which an application might be refused. Sub-section 43B(5)(c) did not refer
to getting more tax than should be collected; the present case was not one of
“the protection of the revenue”. Mr Southern referred to the possibility of an
adjustment under regulations 111 and 116 of the VAT Regulations. The criterion
of “exceptional circumstances” could not be seen as having any basis either in
the legislation or in the courts.
137. Mr Southern
questioned whether the “exceptional circumstances” proviso could be introduced
by official guidance. He argued that the restriction set out in paragraph 2.14
of VAT Notice 700/2 was ‘self-imposed’. It did not have any legal origin. It
was reasonable for HMRC to have regard to their own published guidance, provided
that (a) such guidance did not fetter HMRC’s discretion, and (b) that such guidance
was itself reasonable.
138. In Mr Southern’s
submission the restriction in paragraph 2.14 was inherently unreasonable,
because it meant that retrospective grouping was in practice virtually
unobtainable. The possibility of late grouping was a useful commercial
safeguard, allowed by law, and should not be excluded by administrative
discretion. It provided a lifebelt in situations where – as here – a member of
a group was “in danger of drowning”. The HMRC guidance was simply an attempt to
rewrite the legislation in a different form. On the basis of that guidance, it
was very difficult to see how anyone could obtain grouping with retrospective
effect.
139. By their
guidance, HMRC were trying to establish a negative legitimate expectation. It
did not follow that if an applicant’s situation did not come within the
guidance, he could expect that the power would not be exercised in his favour.
If Parliament had given powers to a certain body, that body could not say that
it would not exercise its powers in a certain way. The reason was plain; powers
were given to a public body by Parliament because it thought them useful and
necessary. Such powers were not to be deprived of any practical application. Mr
Southern referred to various passages in R v Secretary of State for Home
Department, ex p Fire Brigades Union [1995] 2 AC 513.
140. HMRC were
frustrating the will of Parliament; the powers had been given to fulfil the
will of Parliament, not to frustrate it.
141. Mr Southern
questioned whether the outcome for which HMRC contended was consistent with the
modern approach to tax legislation. That approach differed from the former one
of simply looking at the rule in question. Now, it was necessary to look at the
outcome or result and go back to the rule; if that outcome or result did not
really appear to be in accordance with the intentions of the rule, the workings
of that rule might have to be reconsidered in order to produce a sensible
result. In the present case, if HMRC were right in their approach, they would
collect £4 million of tax which they would not have collected if the rules had
been applied sensibly; that was not a sensible outcome. Mr Southern referred to
DCC Holdings (UK) Ltd v Revenue and Customs Commissioners [2011] STC 326.
142. Mr Southern also
questioned whether the outcome for which HMRC contended was consistent with EU
law. He referred to Marks and Spencer plc v Customs and Excise Commrs
(Case C-62/00), [2002] STC 1036, and to the Advocate General’s emphasis on the
result envisaged by the EC legislature being the decisive factor in determining
the question whether the member State has or has not correctly implemented the
directive in question. In the judgment of the ECJ at [34] the Court had set out
the requirements of the principle of effectiveness.
143. Mr Southern
submitted that the outcome sought by HMRC contended was incompatible with EU
law for two reasons, namely the principles of effectiveness and neutrality. The
grouping provisions were a derogation, importing principles of EU law. The ECJ
had stated in Marks and Spencer that rules should not render impossible
or excessively difficult the exercise of rights conferred by Community law. Mr
Southern argued that grouping conferred such a right, and the “proviso”
introduced by HMRC made the exercise of that right excessively difficult or
impossible, thus conflicting with the principle of effectiveness.
144. He referred to
the second principle, of neutrality. The CHL VAT group was making taxable supplies,
being zero-rated supplies. A company or group making taxable supplies should
not suffer the cost of VAT. The case of Rompleman v Minister Van Financiën
(Case 268/83) had confirmed the principle, in the Court’s judgment at [19]. The
ECJ had confirmed in Elida Gibbs Ltd v Customs and Excise Commrs (Case
317/94), [1996] STC 1387 at [31] that the position of taxable persons must be
neutral. It had given similar confirmation in Skatterverket v AB SKF
(Case C-29/08), [2010] STC 419 at [56].
145. Accordingly, a
result which left a taxable person with a large VAT bill could not be right.
Having regard to the neutrality principle, a tax authority could not collect
windfalls which conflicted with that principle. All unduly levied VAT must be
returned to the taxable person. This was why Parliament had put in the grouping
provision.
146. The case of Schmeink
& Cofreth AG & Co (Case C-454-98), [2000] STC 810, demonstrated
that a member State was not entitled to use its powers so as to obtain a VAT
windfall. In his Opinion at [20] and [24], the Advocate General had referred to
the principle of neutrality, despite the fictitious nature of the invoices. In
its judgment at [58] and [59], the Court had stated the requirement to follow
the neutrality principle. Mr Southern commented that even in cases involving
fraud, tax authorities were not allowed to collect VAT which was not properly
due – a “tax windfall”. CHL should be allowed to put right simple errors, a
fortiori where Parliament had provided the means of doing so.
147. In response to
CHL’s arguments, Mr Zwart commented that there was no requirement for a company
to form a VAT group; grouping was voluntary. He referred to the grouping
provisions. The consequence of forming a VAT group was that under s 43(1)(a)
VATA 1994, any supply of goods or services from one member of the group to
another were disregarded, whether it would otherwise have been taxable or
exempt. It was for the corporate group to regulate its VAT position.
148. Mr Zwart
submitted that s 43B(4)(b) conferred on HMRC a discretion to allow membership
of a VAT group earlier than the date of receipt of the application to register
an entity within the particular group.
149. On examination
of s 43B VATA 1994, the first discretion of HMRC arose under s 43B(5). Section
43B(4) self-executed on receipt of an application. Sub-section (4)(a) set out
the default position. Sub-section (4)(b) enabled HMRC to “slide” the time
earlier or later than the date on which the application was received. Mr Zwart
submitted that there was no evidence as to Parliament’s intention; the
submissions made for CHL were generalised. The prescribed position was under
sub-s (4)(a); Parliament had entrusted HMRC to consider whether an application
could be permitted to take effect at an earlier or later date.
150. The consequence
of sub-s (4)(b) was that Parliament had authorised HMRC to rewrite,
post-transaction, VAT on supplies made by the “candidate member”. Thus HMRC
were permitted to “unmake” supplies.
151. Given the
assumptions relating to sub-s (4)(b), it was clear that this power conferred on
HMRC should be exercised with care, as the result of granting an application
with retrospective effect was that the candidate member’s supply history would
be rewritten, not rectified.
152. The second
matter raised by Mr Zwart in his legal submissions concerning the group
registration applications related to the guidance published by HMRC. The
version of Notice 700/2 provided to us is the one dated September 2011. This
therefore post-dates both applications and also HMRC’s decisions in respect of
those applications. However, the paragraph quoted in the two refusal letters
(ie paragraph 2.14) must have been taken from the then existing 2004 version,
and the wording of the 2011 version is exactly the same. Paragraph 2.13 of the
2011 version permits an application to be backdated, but only up to 30 days
prior to the application being received by HMRC and only if it corresponds to
the commencement of the current account period of the existing VAT group, or of
any of the companies forming, joining or leaving the VAT group. As paragraph
2.13 was not directly in point in relation to the Third or Fourth Appeals, we
work on the assumption that its wording corresponds to that of the 2004
version.
153. Mr Zwart submitted
that Notice 700/2 should be viewed as general background information; it
expressed the care with which HMRC were to exercise their discretion under s
43B(4)(b) VATA 1994. He argued that CHL’s expectation from the published
guidance could only have been that the scope of HMRC’s discretion would be
narrowly exercised. According to the guidance, HMRC expressed not a closed mind
but a discretion to consider all ‘potential candidate circumstances’.
154. In their
Statement of Case, HMRC submitted that it followed from the limited discretion
to refuse an application for group membership on the grounds of protection of
the revenue to be found in s 43B(5) VATA 1994, that the discretion conferred on
them by s 43B(4) must necessarily include the discretion to refuse to allow
retrospective group membership in circumstances where it appeared to them that
refusing to allow retrospective group membership was necessary for the
protection of the revenue. Mr Zwart did not repeat or expand on this
submission; we take it into account in arriving at our conclusions on the law
as set out below.
155. In reply, Mr
Southern submitted that the correct position in relation to HMRC’s discretion
was the following;
(1)
Grouping was voluntary. A company had to apply to be admitted to a VAT
group.
(2)
There was no automatic right to group. It depended on HMRC agreement.
HMRC could refuse an application.
(3)
Section 43B(4) allowed a choice of dates from when grouping was to take
effect.
(4)
The HMRC discretion was concerned with the application as such; it was
not confined to s 43B(4) questions.
(5)
The power had to be exercised reasonably.
156. It had not been
disputed that there was no legislative warrant for the “exceptional
circumstances” proviso. There was no legislative restriction on the ability to
backdate the date from which an application to group could take effect. In Save
& Prosper the High Court had held that the clear words of the
legislation placed no temporal limit on HMRC’s power to give retrospective effect
to a grouping application.
157. HMRC had argued
that their collection and management power gave them power to issue guidance.
This was correct. However, that did not empower HMRC to rewrite legislation or
to reduce drastically its potential application. Paragraph 2.14 of Notice 700/2
was not guidance. It was “pseudo-legislation”. It was simply inconsistent with
the law as stated in Save & Prosper.
158. Moreover, the
importance of guidance was that it might create a legitimate expectation. Here
CHL as taxpayer did not rely on legitimate expectation.
(e) Conclusions
on legal issues relating to HMRC’s discretion
159. We accept Mr
Zwart’s submission that s 43B(4)(a) VATA 1994 sets out the default position in
relation to group registration applications. It follows that s 43(4)(b) deals
with exceptions from that default position, and that therefore anything which
falls within s 43B(4)(b) is, in that sense, less usual or possibly “exceptional”.
160. Section
43B(4)(b) confers a discretion on HMRC. Unlike s 43B(5), it gives no
indications of what is or is not to be taken into account in exercising that
discretion. Further, as Mr Southern submitted, s 43B(4)(b) contains no time
limit for “retrospective” applications.
161. We agree that,
as part of their functions of collection and management pursuant to s 5 of the
Commissioners for Revenue and Customs Act 2005, HMRC are empowered to publish
their guidance as to the policy which they expect to follow in relation to
“retrospective” applications. It is clearly reasonable for HMRC to have a
policy to stop indiscriminate “retrospective” applications, as it would be
inappropriate to permit a “free-for-all” approach in relation to such
applications. In that context, we regard the approach taken in paragraph 2.13
of Notice 700-2 as appropriate and reasonable. Paragraph 2.14 appears to us to
be highly restrictive, as the only exceptional circumstances referred to are
ones where HMRC are at fault for either of the reasons specified. We question
whether the possibility of other circumstances meeting the test should also be
mentioned. Subject to that comment, we see no objection to the form of the guidance.
162. However, it is
one thing to state in general terms a policy approach; it is an entirely
different matter to treat such policy guidance as if it were a statement of the
law. We accept Mr Southern’s submission that HMRC cannot limit their statutory
discretion by publishing their guidance; Notice 700-2 is not a form of
published guidance having the force of law. Thus whatever the terms of HMRC’s
guidance, “retrospective” applications in circumstances falling outside it may
still require to be considered on the basis of their individual merits. The
breadth of the unqualified discretion conferred by s 43B(4)(b) is such that any
circumstances could lead to the exercise of HMRC’s discretion in the
applicant’s favour, although having regard to HMRC’s collection and management
responsibilities, the circumstances would have to be exceptional in some way
other than those described in paragraph 2.14 of Notice 700-2 if they were to
qualify for consideration pursuant to the exercise of HMRC’s discretion.
163. We therefore
accept Mr Southern’s submissions as set out in paragraph 139 above, other than
in respect of the “negative legitimate expectation” which he contended that
HMRC were trying to establish. (Although we consider paragraph 2.14 of Notice
700/2 to be possibly over-restrictive in the way in which it is expressed, we
do not regard it as carrying a clear implication that no other circumstances
will be regarded as “exceptional”.) We see no objection to guidance which
emphasises the need for exceptional circumstances in order to justify the
exercise of HMRC’s discretion to accept “retrospective” applications. However,
the result of such guidance should not be to close the minds of those within
HMRC responsible for taking such decisions; the statutory discretion remains
unrestricted, and therefore HMRC must consider whether to exercise their
discretion in circumstances which do not happen to fall within the terms of
their published guidance.
164. Both Mr Southern
and HMRC (in their Statement of Case) referred to the discretion under s
43B(4)(b) as extending to matters wider than merely the date from which a
“retrospective” application might be permitted to take effect. In particular,
such broader matters were said to include “the protection of the revenue”. Before
considering the matters to be taken into account in exercising the discretion,
we think it appropriate to consider the effect of s 43B(4) in the context of s
43B as a whole in order to establish the precise nature of HMRC’s discretion.
The language of s 43B(4)(b), taken with that of the introductory words of s
43B(4), appears to be confined to the time with effect from which the
application is to be taken to be granted. The words of the sub-section itself do
not appear to contemplate refusal, and appear to be mandatory in nature. The
possibilities envisaged are:
(1)
the effective date is that on which the application is received;
(2)
the effective date is some earlier date allowed by HMRC;
(3)
the effective date is some later date allowed by HMRC.
165. However (as
indicated above in relation to the jurisdiction question) s 43B(4) expresses
itself to be subject to s 43B(6), which does refer to the refusal of an
application. One way of construing the reference to sub-s (6) is that it
incorporates by reference the concept of “refusal” into s 43B(4). Another
construction, taking into account the whole of s 43B, is that the only
references to “refusal” within the section are those in sub-ss (5) and (6), and
that the mandatory approach in sub-s (4) needs to be qualified to ensure that
any refusal pursuant to sub-s (5) is not denied effect by that mandatory
approach. Putting to one side for the moment the words “subject to subsection
(6) below”, the initial words are [with our emphasis]:
“Where this section applies in relation to an
application, it shall . . . be taken to be granted with effect from—
(a) the day on which the application is received
by the Commissioners, or
(b) such earlier or later time as the
Commissioners allow.”
166. On its face, based
on the mandatory language which s 43B(4)(b) uses, it does not confer on HMRC a
discretion to refuse an application for group registration; their discretion would
appear to be limited to deciding on the effective date from which the group
registration is permitted to run, in circumstances where the applicant company
requests some date other than that in s 43B(4)(a).
167. As a matter of
language, we regard the second construction set out above as the preferable one.
A significant problem with the first construction is that it would appear to
introduce, by means of the indirect reference to sub-s (6), a further
discretion for HMRC to refuse any application, whether falling within
the “default” category under s 43B(4)(a), or within either of the categories
contemplated by s 43B(4)(b). If that had been the intention of Parliament in
1999 when the “grouping” provisions were amended, we would have expected it to
be clearly and expressly stated in s 43B(4), rather than being implied.
168. We therefore
conclude that it is not open to HMRC, on the basis of s 43B(4)(b) alone, to
refuse outright a “retrospective” application which in all relevant respects
meets the necessary statutory qualifications; the sub-section requires them to
take a decision as to the effective date of the candidate company’s
registration, rather than to reject the application.
169. Thus in our
view, the discretion in s 43B(4)(b) is limited to the time with effect from
which a valid application is to be treated as granted, and does not extend to
consideration of whether it should be granted.
170. We consider that
the construction which we place on s 43B(4) is consistent with the construction
of the whole of s 43B. Section 43B(4)(b) does not concern refusals, but merely
the exercise of a discretion as to the effective date of group registration. (We
have referred above to the questions concerning the appeal rights and
jurisdiction in respect of the exercise of that discretion.) Section 43B(5) and
(6) are concerned with refusals. Sub-section (5) places a 90 day time limit for
any refusal by HMRC for any of the reasons set out in s 43B(5), and s 43B(6)
states that if HMRC refuse an application, it shall be taken never to have been
granted; in our view, this is intended to confirm the effect of the refusal and
to disapply the normal mandatory rules set out in s 43B(4).
171. That
construction also explains the reason for the specific and different appeal
provisions contained in s 84(4A) VATA 1994 relating to a refusal of a group
registration application on the grounds set out in s 43B(5)(c) VATA 1994. An
appeal against a decision by HMRC to “refuse” an application on these grounds requires
a different approach. The appeal is not to be allowed unless the tribunal
considers that the “unreasonableness” test has been met. While the appeal
continues, the refusal remains in force. If the appeal is allowed, the effect
of the refusal is cancelled, leaving the applicant in the position of any other
applicant pursuant to s 43B(4).
172. We find this
construction of s 43B to be logical:
(1)
HMRC must register a qualifying group or candidate group member;
(2)
The normal timing for the effective date of registration is the date of
receipt of the application;
(3)
HMRC has a discretion to permit group registration to take effect from an
earlier or later date, but may decide that the effective date should be some
date other than that requested by the applicant. There is no statutory time
limit for “retrospective” applications, the question of timing being a matter
for HMRC’s discretion;
(4)
If an applicant wishes to challenge HMRC’s decision to grant the
application with effect from a date other than that requested, the applicant
may appeal on the basis of the principles set out in John Dee;
(5)
HMRC may (within the 90 day period) refuse the application for any of
the reasons in s 43B(5);
(6)
There is a separate appeal regime for an appeal against a refusal
pursuant to s 43B(5)(c) (the other reasons set out in s 43B(5) being based on
lack of eligibility, against which it would not be appropriate to permit any
appeal).
173. We consider this
construction of the relevant provisions to be consistent with the general
scheme of the legislative changes made to the “grouping” provisions by s 16 of
and Schedule 2 to the Finance Act 1999.
174. It follows from
our views as to the language of s 43B(4) VATA 1994 that it is not a proper
exercise of HMRC’s discretion under s 43B(4)(b) simply to refuse the
application. If, on the basis of the information available to them, HMRC take
the view in respect of a “retrospective” application that they should not
permit it to be granted with effect from the date requested, they must
determine what alternative date should be the effective date, and grant the
application with effect from that date instead. If the applicant group
disagrees with HMRC’s decision as to the date, it may seek to challenge that
decision on the basis considered above.
175. If, for
“protection of the revenue” reasons, HMRC wishes to refuse an
application, we consider it necessary for them to state expressly in their
decision letter both that the application is being refused, and that the refusal
is pursuant to s 43B(5)(c) VATA 1994. (The 90 day time limit for refusals under
s 43B(5) will apply.) The applicant will then be aware that the appeal rights
in respect of the refusal are governed by s 84(4A) VATA 1994, rather than being
in respect of the exercise of the discretion under s 43B(4)(b).
176. We now consider
what factors should be taken into account by HMRC in exercising their
discretion under s 43B(4) VATA 1994 in order to arrive at their decision as to
the effective date of group registration. As we have already mentioned, s
43B(4)(b) VATA 1994 does not set out any indication of what these may be (in
contrast to the very specific criteria set out in s 43B(5) in relation to
refusal). Although s 43B(5)(c) is specifically set out as grounds for refusal
of any form of group registration application, with the appropriate appeal
mechanism as described above, we do not think that this in any way precludes
HMRC from taking into account the protection of the revenue in deciding whether
to exercise their discretion under s 43B(4)(b). As we have concluded in relation
to the latter, the appeal rights of the applicant and the powers of the
Tribunal are different.
177. Mr Zwart
summarised his submissions by means of the shorthand expression that CHL was
seeking to rewrite history by its “retrospective” applications for C28 and C26
to join the CHL VAT group. In closing his submissions, he expressed the hope
that he had “blown away the smoke”. In his reply for CHL, Mr Southern argued
that the neutrality argument had simply not been addressed. We do not think
that this is entirely accurate. Mr Zwart did seek to distinguish certain of the
cases cited by Mr Southern. However, we do consider that Mr Zwart could have
assisted us further by specifically drawing our attention to the inherent
circularity of CHL’s arguments based on protection of the revenue, the
neutrality principle, and the modern approach to tax legislation. These
arguments were fundamental to CHL’s contentions that the discretions to accept
“retrospective” applications should have been exercised in its favour both in
respect of C28 and C26. We think it appropriate to test the assumptions on
which those arguments were based.
178. Although we
consider the facts separately below, certain facts are relevant to the question
of principle. CHL submits that the VAT group has been disadvantaged as a result
of the inadvertent error in assuming that C28 and C26 were members of the VAT
group at the material dates. It argues that VAT liabilities have been incurred
which would not have been incurred if those companies had been members of the
CHL VAT group at those dates. It claims that being made subject to those
liabilities breaches the principle of neutrality, as the VAT group is fully
taxable (or virtually so). It also seeks to rely on broader principles of
statutory interpretation.
179. Putting Mr
Zwart’s submissions in a different way, C28 and C26 have done what they have
done, with the result that particular VAT liabilities have been incurred. If
the picture is “frozen” at the point just before the “retrospective”
applications in each case, there is no basis for interfering with their VAT
treatment either on the grounds of the neutrality principle or by reason of any
interpretation of the relevant statutory provisions. By its own argument, CHL
acknowledges that the VAT liabilities have been incurred; it also acknowledges
that inadvertent errors were made within its corporate group, and that those
errors led to the liabilities being incurred.
180. The effect which
CHL seeks by means of the “retrospective” applications is to eliminate the VAT
liabilities which have been incurred within the corporate group. The
applications amount to requests to HMRC to “write off” substantial amounts of
VAT which, as a result of the inadvertent administrative errors acknowledged by
CHL, have become due. CHL is asking HMRC to cancel out the effects of those
errors. This raises the question whether it is appropriate for HMRC to use
their statutory discretion to rescue a taxable trader from the consequences of its
own actions or omissions.
181. Thus (viewing
the position in relation solely to the Third and Fourth Appeals) it is only if the
“retrospective” applications are granted that these liabilities would not be
due. We regard this as a factor of major significance for HMRC in reaching the
decision whether to exercise their discretion to permit registration with
effect from an earlier date, particularly given the length of the periods
between the effective dates sought and the dates of the two applications.
182. In the context
of protection of the revenue, Mr Southern referred to HMRC collecting more tax
than was due; we do not construe the position, measured immediately before the
applications, as being that unwarranted liabilities to VAT had been incurred. Instead,
through inadvertence, liabilities had been triggered, and in consequence were
properly due. The question for HMRC in deciding whether to exercise their
discretion is therefore whether they are prepared, given their collection and
management responsibilities, to favour members of a corporate group by granting
“retrospective” VAT group registration applications.
183. In this context,
we note Ms Colegrave’s comment in the C26 application letter dated 23 February
2011 that CHL’s advisers had experience of retrospective applications being
accepted for entities operating in other industry sectors including those where
“sticking” VAT would occur if retrospective treatment were not applied. We
accept that this may well be the case, but we have no specific evidence to
demonstrate this to us. In any event, it is for HMRC to consider equity as
between taxable persons as a factor when they exercise their discretion; they
are the only party with full information as to what has been taken into account
in other cases involving “retrospective” applications.
184. We examine
below, in considering the factual issues, whether HMRC did exercise their
discretion under s 43B(4)(b) VATA 1994 in arriving at their conclusion that the
applications should be refused.
185. Apart from the
matters to which we have referred, we accept that there may well be a range of
further considerations which are relevant to the exercise by HMRC of their
discretion under s 43B(4)(b). As Mr Zwart submitted, the discretion is
completely open, and it is therefore impossible (and inappropriate) for us to
seek to give an exhaustive list of the factors to be taken into account. The
discretion is a statutory one, and as we have already indicated, it cannot be
constrained by HMRC’s published guidance.
(f) Factual
issues relevant to the group registration applications
186. Although Ms
Colegrave referred in her evidence to the erroneous assumptions made at the
time of the relevant transactions that C28 and C26 respectively were part of
the CHL VAT group, it was not until after the inadvertent error in respect of
C28 had been discovered that any suggestion of a possible “retrospective”
application was discussed with HMRC, at the meeting on 26 February 2010. The
application was eventually submitted to HMRC on 24 November 2010. The first
mention of the CHL VAT group’s intention to make a “retrospective” application for
C26 was in Mr Sharp’s letter to Mr Gradwell dated 12 October 2010. That
application was subsequently submitted on 23 February 2011. It appears to us
that the applications were a matter of last resort for the CHL corporate group,
after the attempts to reach agreed solutions with HMRC for the problems arising
as consequences of the transactions involving those companies had proved
unsuccessful.
187. In relation to
C28, the application made in November 2010 sought group registration with
effect from 30 July 2007, over three years before. In relation to C26, the
effective date requested was 18 April 2008, approximately two years and ten
months before the date of the application.
188. Ms Colegrave’s letter
accompanying the application in respect of C28 set out a summarised list of the
factors forming the basis for that application. Her later letter enclosing the
application relating to C26 set out much more detailed arguments in support of
that application. In substance, these arguments have been considered above.
189. In the final
section of that letter, headed “Conclusion”, Ms Colegrave stated:
“I fully accept that we have made an error in
failing to submit an application to include C26 in the Copthorn VAT group and
as such we find ourselves in the hands of HMRC to mitigate the consequences of
this error.”
190. It is clear from
HMRC’s decision letters relating to both C28 and C26 (see paragraph 107 above)
that the two HMRC officers concerned did not consider it appropriate to respond
to any of the points set out in Ms Colegrave’s covering letters. As a result,
there is no evidence to show whether or not they took any of the matters raised
by her into account in arriving at their respective decisions. As we have indicated
above, the letters appear to us to be in standard form. This is emphasised by
the failure of either officer to substitute the appropriate details for the
options in square brackets in the “review” paragraph. (That may explain why no
review was sought, and may also answer Mr Zwart’s suggestion that failure to
seek a review somehow confirmed acceptance by CHL of the position as set out by
HMRC in the decision letters.)
191. Whether or not
the letters were in standard form, they do not appear to be consistent with the
terms of s 43B(4) VATA 1994. They make no reference to HMRC having decided not to
exercise their discretion to permit the application to have retrospective
effect. Nor do they state that instead the application is to have effect from
the date of receipt by them, or any other date. Instead, they refuse the
application, and state that under s 43B(6) the application is to be treated as
if it had never been made.
192. As we have
concluded, it is not open to HMRC simply to refuse an application on the basis
of s 43B(4)(b) VATA 1994. All they are permitted to do is to decide whether
they should exercise their discretion under that provision, and if they decide
not to do so, the position defaults (as Mr Zwart submitted) to s 43B(4)(a),
under which the effective date is the date on which they receive the
application.
193. It follows that,
by issuing in each case a decision letter in the form of a refusal, HMRC have
failed to provide any evidence to show that they have exercised their
discretion under s 43B(4)(b). Further, the reference in the letters to the
effect of s 43B(6) is inappropriate, as s 43B(4) makes no provision for the
outright refusal of an application.
194. The position
would be different if the letters had stated in terms that the applications had
been refused on the grounds set out in s 43B(5)(c) VATA 1994, as s 43B(5)
permits a refusal. We re-emphasise that decision letters which communicate
refusals based on such grounds must indicate clearly that the refusal is made
under that sub-section, so that the applicant can be made aware of the
relevance of the particular appeal provisions provided in such circumstances by
s 84(4A) VATA 1994.
195. There is no
evidence that the letters amounted to refusals based on “protection of the
revenue” grounds under s 43B(5)(c) VATA 1994. There was no suggestion in
subsequent correspondence, or in the arguments put to us by HMRC, that the
“refusal” of the applications was based on this provision rather than s 43B(4).
Further, HMRC did not choose to present evidence from the officers who took the
decisions relation to C28 and C26. Mr Zwart’s arguments were directed at s
43B(4) rather than s 43B(5)(c). Although in many respects it would have made
somewhat easier our task of dealing with the Third and Fourth Appeals if the
decisions had been based on s 43B(5)(c), we find that the decisions were not
decisions under that provision.
196. We must
therefore regard the two decisions as purported refusal decisions under s
43B(4) VATA 1994. As concluded above, HMRC do not have the authority under s
43B(4) to refuse an application outright. It follows that they have not acted
within the terms of that sub-section. In our view, they should have approached
matters differently. If they did not consider that the inclusion, respectively,
of C28 and C26 within the overall CHL VAT group registration should take effect
from the dates requested by CHL, they should have stated the dates from which
those companies were permitted to be included. Whether this would have been the
dates on which the applications were received, or different dates, would have
been a matter entirely within their discretion under s 43B(4)(b).
197. In its Grounds
of Appeal for the Third Appeal, CHL stated that the decision was both wrong in
law and, in the circumstances of the application, both unreasonable and unfair.
Its Grounds of Appeal for the Fourth Appeal were virtually identical. We are
satisfied that the decisions made by HMRC to refuse the applications outright,
rather than granting them from such dates as HMRC considered appropriate, were
wrong in law. In the light of this, we do not consider that we are in a
position to make findings on the other issues raised by CHL in these Grounds of
Appeal. However, as the parties made submissions concerning the basis on which
HMRC arrived at their decisions, we set out our comments on those submissions.
198. Mr Southern
submitted that the decision letters were absolutely standard computer-produced
letters having the same format. The respective letters from Ms Colegrave
seeking group registration for C28 and C26 had been very full accounts of the
particular circumstances relating to those companies, and no account appeared
to have been taken of the matters raised in those letters. It was therefore
plain from this correspondence that HMRC had not merely fettered their
discretion by applying a departmental policy; they had not given any
consideration at all to the matters raised in those letters. CHL therefore
submitted that the discretion vested in HMRC had simply not been exercised at
all.
199. Mr Zwart submitted
that the matters raised in CHL’s appeals were a considerable distance outside
the ‘candidate circumstances’ set out in HMRC’s Notice 700/2 and, premised as
they ultimately were on the commercial expediency of corporate tax and account
processes as against VAT processes, were manifestly outside the guidance
criteria.
200. He argued that HMRC
had exercised their discretion under s 43B(4)(b), as shown by their letters
dated 9 December 2010 relating to C28 and 8 March 2011 relating to C26. Those
decisions were not unfair by an application of the statutory scheme. Nor had
the decisions been unreasonable, because they had been based on evidence
available to HMRC.
201. In the absence
of evidence from the officers responsible for the decisions, we are unable to
arrive at any conclusions as to the basis on which they arrived at those
decisions, or as to whether they exercised their discretion but declined to
move away from the default position of granting the applications with effect
from the date of receipt. Nor do we have any evidence concerning their reasons
for expressing their decisions in terms of outright refusals rather than
adopting that default position. Accordingly, there is no evidence to show
whether or not their decisions were, to use a shorthand expression,
“unreasonable” within the test applicable under John Dee.
202. Mr Southern argued
that the officers had not taken into account the detailed information set out
by CHL in the application letters written by Ms Colegrave. There is no evidence
to show that they did, as the letters made no specific response to any of the
points put by Ms Colegrave. However, without evidence from the officers, it
must equally be said that there was no evidence to establish that they had not
taken that information into account. The position could be that they did so,
but then chose to use standard form decision letters in order to communicate
the results of their decisions.
203. We have found
that HMRC did not deal with the applications in accordance with the terms of s
43B(4) VATA 1994. As a result, Mr Southern’s submission as to the process falls
away. Even if it had been open to us to accept this submission, that would not
have resolved the position; we would have been required to review (in
accordance with the decision in John Dee) whether the decisions taken by
their officers would inevitably have been the same had account been taken of
the additional material supplied by CHL when submitting the applications. In
the circumstances, it is inappropriate for us to make any findings in respect
of the latter issue.
204. Nor do we
consider it appropriate to make any findings as to the potential effects of C26
being permitted to become part of the CHL VAT group registration with effect
from 18 April 2008. We comment that we were not provided with an explanation of
those potential effects. Although the information does not constitute evidence,
we are aware from the skeleton arguments of both Mr Southern and Mr Zwart that
on 22 March 2011, an application was made by CHL for C26 to become a member of
the CHL VAT group, and that this was accepted on 31 March 2011. Mr Zwart’s
skeleton argument states that on 3 June 2011, CHL rendered a VAT return for the
period 1 May 2011 to 31 May 2011 for a net repayment of £1,938,772.46 which
included the recovery of the previously assessed and paid sum of £1,150,096.
Whether CHL seeks by means of the Fourth Appeal to recover further sums, or to
achieve other objectives by means of the “retrospective” group registration
application for C26 to be included in the CHL VAT group with effect from 18
April 2008, is not clear to us. Ms Colegrave’s evidence was that the £1,150,096
assessed on LL had been paid by CHL. (Mr Zwart’s skeleton argument stated that
this payment was made on 27 January 2011, but no documentary evidence of this
was provided to us.) In any event, we do not consider it appropriate for the
subsequent history to be taken into account by HMRC in considering the original
“retrospective” application.
205. The only course
open to us is to allow the Third and Fourth Appeals and to remit both original applications
to HMRC for them to consider afresh, in the light of our findings in this
decision, whether they should take effect from the dates on which they were
received by HMRC, on the dates requested by CHL, or on other dates determined
by HMRC pursuant to their “open” discretion under s 43B(4)(b) VATA 1994. We do
not consider that the exercise of that discretion by HMRC should take into
account any subsequent applications relating to C28 or C26. As in both cases
the 90 day period has expired, it is not now open to HMRC to refuse the
applications for “protection of the revenue” reasons under s 43B(5)(c) VATA
1994.
206. If it is HMRC’s
practice to use standard form “refusal” letters for “retrospective” group
registration applications, we recommend that they should reconsider the form of
such letters in the light of the matters considered above.
The First Appeal
207. In its Notice of
Appeal, the background to CHL’s grounds of appeal was expressed in the
following terms:
“This appeal is being made against the refusal of
HMRC to accept a belated notification of an option to tax in respect of a property
at Unity Mill, Heywood Lancs. As a result of that refusal HMRC have maintained
an assessment for £2,187,500, being input tax incorrectly deducted by [CHL] in
respect of an exempt supply. [CHL is] appealing against the refusal to accept a
belated notification of the option to tax and consequently against the
assessment for input tax incorrectly recovered.”
208. Thus CHL has
appealed against the Preferred Assessment. No mention was made of the
Alternative Assessment. Although CHL’s Notice of Appeal does not refer
specifically to the Alternative Assessment, a copy of the letter dated 22 July
2010 from Mrs Howes was submitted with the Notice of Appeal. This referred both
to the Preferred Assessment and the Alternative Assessment. We therefore treat
CHL’s First Appeal as extending also to the Alternative Assessment.
209. The transactions
in respect of Unity Mill took place in July 2007. The legislation applicable at
that time was paragraph 3(6)(b) of Schedule 10 to VATA 1994, before
substitution by article 2 of The Value Added Tax (Buildings and Land) Order
2008 (SI 2008/1146). Paragraph 3 of Schedule 2 to that Order provides that
anything done under a superseded provision of Schedule 10 as it stood before
being rewritten has effect after commencement of the corresponding rewritten
provision as if done under or for the purposes of that corresponding rewritten
provision. As a result, we consider the position under Schedule 10 as
rewritten, rather than under the original version of Schedule 10.
210. Paragraph 2 of
Schedule 10 to VATA 1994 (“Sch 10”) is as follows:
“Effect of the option to tax: exempt supplies
become taxable
2—
(1) This paragraph applies if—
(a) a person exercises the option to tax any
land under this Part of this Schedule, and
(b) a grant is made in relation to the land at
any time when the option to tax it has effect.
(2) If the grant is made—
(a) by the person exercising that option, or
(b) by a relevant associate (if that person is a
body corporate),
the grant does not fall within Group 1 of Schedule 9
(exemptions for land).
(3) For the meaning of “relevant associate”, see
paragraph 3.”
(We do not need to consider the definition of “relevant associate”.)
211. Paragraph 20 of
Sch 10 provides:
“Requirement to notify the option
20—
(1) An option to tax has effect only if—
(a) notification of the option is given to the
Commissioners within the allowed time, and
(b) that notification is given together with
such information as the Commissioners may require.
(2) Notification of an option is given within the
allowed time if (and only if) it is given—
(a) before the end of the period of 30 days
beginning with the day on which the option was exercised, or
(b) before the end of such longer period
beginning with that day as the Commissioners may in any particular case
allow.
(3) The Commissioners may publish a notice for the
purposes of this paragraph specifying—
(a) the form in which a notification under this
paragraph must be made, and
(b) the information which a notification under
this paragraph must contain.
(4) . . .”
212. Thus in order to
disapply the normal exemption provisions in Schedule 9 to VATA 1994, there are
two requirements. The first is that the option must be exercised. The second is
that the option must be notified to HMRC within the allowed time. Paragraph
20(2)(b) of Sch 10 makes clear that notification can be given later than the
expiry of the normal 30 day period, but only if HMRC exercise their discretion
to allow this in the particular case.
213. In Marlow
Gardner & Cooke, Mann J held that an election to waive exemption (under
the previous legislation) could take effect after the landowner had disposed of
the land.
214. In relation to
the first requirement, CHL contends that the option was exercised by CPUKL.
HMRC’s argument is that the option was not exercised; all that happened was an
expression of intention to exercise the option, with no action to fulfil that
intention. In the light of these opposing contentions, we review the relevant
issues of fact.
215. We have set out
above the extract from the Board Minutes relating to Unity Mill. The first
issue to consider is the status of those Board Minutes.
216. On their face,
they appear to be minutes relating to Countryside Properties (Northern) Ltd
(“CPN”). However, in her witness statement Ms Colegrave described the meeting
as a meeting of the Northern Divisional Board. In oral evidence she explained
that this was a “high powered meeting”, with senior executives present. Mr
Graham Cherry, described in the Minutes as Chairman, was the Chief Executive of
CHL and of several other companies within the CHL corporate group. The
divisional Boards met on a monthly basis. All persons employed within the CHL
group were employed by CPUKL, which was the main operating company.
217. The Divisions
were agencies for that main company. She stated that the properties within the
corporate group were beneficially owned by CPUKL. As a result of the de-listing
of CPUKL from the Stock Exchange, there was a requirement for the legal
interest in its properties to be held by nominees, which was the reason for
using the Nominees. There was no specific recharging; a single general ledger
was maintained for the whole group. In the present case, everything had been
accounted for together. Exceptions from this were made for special purpose
vehicle (“SPV”) companies. At the statutory accounts stage, balances from the
Northern ledger were separately identified.
218. Any one of the
four directors of CPUKL present at the 27 July Board meeting (including Ms
Colegrave herself) would have been authorised to sign a VAT election [ie what
is now described as an option to tax].
219. The decision
taken at the Board meeting was to put the Unity Mill project into a new SPV,
C28, to allow for the possibility that a subsequent joint venture might be
formed.
220. In the course of
the hearing, after Ms Colegrave had finished giving her evidence, we concluded
that there were various matters in respect of which further evidence from her
was necessary in order to clarify the position. (We had previously indicated,
after hearing her evidence, that this might prove necessary.) At the beginning
of the third day of the hearing, we requested that she should be recalled. Ms
Colegrave was able to attend later that morning, and we put our questions to
her.
221. Ms Colegrave
provided us with full copies of the Board Minutes, as the document previously
in evidence was merely an extract. She stated that the only directors of CPN
were Mr Simpson and Mr Kelly. She was a director of CPUKL, but not of CPN. CPN
was a dormant company, and had no beneficial interest in any land.
222. She explained
that before the management buyout in 2005, what was now CPUKL (company number
00614864) had been named Countryside Properties PLC. Following the refinancing,
it was not permitted to use the term “PLC” for that company. When persons
within the CHL corporate group referred to “CPPLC”, they were referring to what
had become CPUKL. A new company with the former PLC name had acquired the
shares in CPUKL. That “new” PLC was there for nominal and marketing purposes;
it owned no assets other than shares of other companies in the group.
223. In response to
further cross-examination by Mr Zwart, Ms Colegrave stated that there was a committee
of the main CPUKL Board, known as the corporate management committee. The
members were the three Cherry brothers, and Ms Colegrave. All decisions within
the CHL corporate group were made with reference to this committee, which met
weekly and kept minutes of its meetings.
224. It is clear from
the information on the corporate structure diagram as at 27 July 2010 included
in the evidence that each of the three Cherry brothers holds one third of 50
per cent of the CHL shares; the other 50 per cent was held at that time by Bank
of Scotland plc.
225. We accept Ms
Colegrave’s evidence as to the status and nature of the meeting on 26 July 2007.
Although in form the Board Minutes recorded the meeting as being a Board
meeting of CPN, we find on the balance of probabilities that the decisions
taken did not relate to CPN, given its status as a dormant company. We are
satisfied that the decisions were decisions of CPUKL, taken through the medium
of its “Northern Division”, even though this was not itself a legal entity.
226. Mr Zwart
submitted that in agreeing that an election would be made, CPUKL was merely
planning to make an election (ie to opt to tax); there was a difference between
planning to do something and positively doing it. There had to be an actual
making of an election as opposed to a plan to make an election. CHL had had
considerable time to find evidence of the actual making of an election; it had
not disclosed any such evidence. The threshold requirement remained an actual
decision, taken informally or otherwise. He submitted that there had been no
actual decision.
227. We are
satisfied, on the basis of Ms Colegrave’s evidence as to the seniority of the
relevant persons present at the Board meeting on 26 July 2007, that the
decision was taken by and for the main operating company, described informally
as “CPPLC”, to elect to waive VAT exemption in respect of Unity Mill. The
reference to “CPPLC” should have been to CPUKL. We accept Ms Colegrave’s
evidence as to the continuing reference, by employees and directors within the
CHL corporate group, to CPUKL under its further abbreviated name of “CPPLC”. We
regard it as significant, as brought out by Mr Southern in his further
re-examination of Ms Colegrave after our questions, that no further Board
action was deemed necessary following the decision to waive exemption. It is
clear from other matters recorded in the full Board Minutes, concerning
different projects, that any item requiring further Board action would always
be annotated to that effect. The fact that there is no such annotation relating
to waiver of VAT exemption in respect of Unity Mill therefore supports the
conclusion that, as far as the Board of CPUKL was concerned, nothing more
needed to be done, any further steps being a matter of implementation by
others.
228. We are unable to
access a copy of the version of HMRC’s Notice 742A, “Opting to tax land and
buildings”, which was current at 27 July 2007. We note, however, that the June
2010 version contains the following statement at paragraph 1.3:
“However, you can opt to tax land. For the purposes
of VAT, the term ‘land’ includes any buildings or structures permanently
affixed to it. You do not need to own the land in order to opt to tax.”
229. We have no
reason to assume that there has been any change in HMRC’s view as expressed in
the third sentence of that extract. It confirms that it was open to CPUKL on 27
July 2007 to exercise the option in respect of Unity Mill, even though
completion of its acquisition of that property did not take place until three
days later.
230. The difficulties
of identifying which company in a group has taken a decision and establishing
the scope and effects of that decision, were highlighted in the direct tax case
of Purolite International Limited [2012] UKFTT (475) TC (TC02152). In
the present case, it has proved necessary to request additional evidence to
establish the position. On the basis of all the evidence, we are satisfied that
CPUKL took a decision at the 26 July 2007 meeting in relation to the exercise
of the option. Ms Colegrave informed us that a stricter approach had now been
adopted within the CHL corporate group with a view to avoiding difficulties of
the nature experienced in the context of these appeals. This change in approach
to corporate governance seems to us an essential step in seeking to protect the
group against the consequences of errors and omissions in its operations.
231. Thus we consider
that the CHL VAT group has satisfied the first requirement; it has exercised
the option to tax. Whether the option is effective therefore depends on the
second requirement, as to notice within the “allowed time”. Notice was not
given within the 30 day normal time limit. Instead, belated notification of the
option to tax was given to HMRC by Ms Colegrave on behalf on CPUKL; the date of
the form VAT1614A was 13 May 2010, and the effective date of the option was 30
July 2007 (ie the date of completion of the purchase by CPUKL).
232. In her letter
dated 24 August 2010 notifying CHL of HMRC’s refusal to accept belated
notification, Eleanor Thompson of HMRC’s Option to Tax National Unit appears to
have adopted a working assumption that the option to tax had been exercised.
Her letter did not suggest anything to the contrary. She referred to the second
stage required for a valid option, namely to notify HMRC. She then referred to
HMRC’s discretion under paragraph 20(2)(b) of Sch 10 to accept belated
notification, and stated that HMRC had decided not to exercise their discretion
in CPUKL’s case. She continued:
“This is on the basis that as well as [HMRC] not
having been notified of the option to tax, it appears that an exempt supply was
made of the property following the requested effective date of the option to
tax.
This is confirmed in your letter of 2 August 2010
where you state ‘the land was sold to [C28], which was erroneously assumed also
to be a member of the Group VAT Registration. On this basis no VAT invoice was
raised, on what was, erroneously, treated as an intra-VAT group transaction.’
Furthermore, you stated that ‘the transfer was not treated by us as a taxable
supply’.
Therefore, you have failed to meet the conditions
for belated notification of option to tax as per Business Brief 13/05 . . .”
233. In her reply
dated 7 September 2010, Ms Colegrave stated:
“We remain of the view that it is not correct to say
that we made an exempt supply. In our letter of 2 August we confirm that we
were aware that having made the option to tax, our supplies of the property
would, as a result, be taxable supplies. However, as we also explained our
failure to charge VAT resulted from our mistaken belief that [C28] was in the
same VAT group as [CPUKL].
On that basis, notwithstanding the fact that we
failed to notify HMRC of our option, we treated the supply as an intra group
supply, which, strictly and pedantically was a taxable supply. With the
benefit of pedantic hindsight, what we should have stated in our letter to you
dated 2 August was that ‘the transfer was not treated by us as a supply liable
to the standard rate of VAT’.”
She contended later in her letter that the failure to
charge and account for output tax was consistent with the requirement that the
taxpayer must be seen to have acted, after exercising an option but failing to
notify it within the 30 day period, on the basis that an option had been
validly exercised. She argued that, on the basis of the view that C28 had been
part of the CHL VAT group, that group had acted consistently with the
requirement that output tax must have been properly charged and accounted for.
234. In Mr Braeger’s
review letter dated 29 September 2010, he implicitly accepted the working
assumption made by Ms Thompson that the option had been exercised. His
conclusions relating to the option to tax related only to the question whether
HMRC’s decision not to exercise their discretion to accept belated notification
should be upheld.
235. The question
whether the option was in fact exercised appears not to have been raised until
CHL’s Notice of Appeal was lodged. As no decision on that question was made by
HMRC in arriving at their decision not to accept belated notification of the
option, and as we have found that the option was exercised, we examine the
exercise of HMRC’s discretion without further reference to the fulfilment of
that first requirement.
236. Mr Zwart argued
that in arriving at their decision not to accept belated notification, HMRC had
properly exercised their discretion under paragraph 20(2)(b) of Sch 10.
237. Mr Southern
argued that, given that there was no tax at issue, and no exempt supplies by
C28, there were no grounds for HMRC not accepting late notification of the
option to tax.
238. The Tribunal’s
jurisdiction in relation to CHL’s appeal against HMRC’s decision is made clear
by s 83(1)(wb) VATA 1994, under which an appeal lies with respect to:
“any refusal of the Commissioners to grant any
permission under, or otherwise to exercise in favour of a particular person any
power conferred by, any provision of Part 1 of Schedule 10.”
239. Section 84(7ZA)
VATA 1994 sets out the Tribunal’s powers in respect of such an appeal:
“(7ZA) Where there is an appeal against such a
refusal as is mentioned in section 83(1)(wb)—
(a) the tribunal shall not allow the appeal
unless it considers that HMRC could not reasonably have been satisfied that
there were grounds for the refusal, and
(b) the refusal shall have effect pending the
determination of the appeal.”
240. Thus it is not
for the Tribunal to express its views as to the decision arrived at by HMRC in
refusing to exercise their discretion to accept belated notification; the only
question that the Tribunal can consider is whether HMRC could not reasonably
have been satisfied that there were grounds for the refusal.
241. In relation to
the discretion, HMRC published their guidance in Business Brief 13/05. (An
incomplete copy of this was included in the evidence, but we have been able to
access this guidance through other sources.) The relevant passage states:
“Exercising the discretion
HMRC will usually accept a belated notification if a
trader provides evidence, such as the minutes of a Board or management meeting,
or correspondence referring to the decision. However, we accept that this is
sometimes not available, so in its absence we would normally accept a statement
from the responsible person, plus evidence that—
— all the relevant facts have been given;
— output tax has been properly charged and
accounted for from the date of the supposed election; and
— input tax recovery in respect of the land or
building is consistent with the trader having made taxable supplies of it.
There may be other circumstances where we would
accept a belated notification, but this would depend on the individual
circumstances of the case.”
242. We consider this
guidance to be perfectly reasonable, in particular because it allows for “other
circumstances”, and do not consider that it fetters the discretion under
paragraph 20(1)(b) of Sch 10. In the light of that guidance, it is clear that
Ms Thompson took into account all the information provided to her by Ms
Colegrave in her application letter dated 13 May 2010 and her subsequent letter
dated 2 August 2010 in response to Ms Thompson’s letter dated 29 June. We do
not consider that Ms Thompson took into account any irrelevant matters in arriving
at her conclusion.
243. Ms Colegrave’s
letter dated 2 August 2010 (set out at paragraph 29 above) referred to the
reasons why CPUKL had not acted in accordance with the option to tax. The
acknowledgment that CPUKL had not done so amounted to an indication that CPUKL
did not fall within the terms of HMRC’s normal approach as set out in the
Business Brief. This left HMRC to consider the position in the light of CPUKL’s
“individual circumstances”.
244. Whatever CPUKL
thought the position to be, or intended it to be, it had as a matter of fact
made a supply of the land to C28 before notifying the option to HMRC. As it had
not completed both the requirements for a valid option, that supply could not
be a taxable supply and was therefore by default an exempt supply.
245. In its Grounds
of Appeal, CHL contended that HMRC’s failure to exercise their discretion to
accept the belated notification led directly to a breach of fiscal neutrality.
Our views on this issue are the same as set out above in the context of the
group registration issue. Whether or not CHL intended it to be the case, the
actions and omissions of CPUKL have resulted in the cost of the VAT charge
falling on the CHL VAT group despite that group’s position as a fully taxable
(or almost fully taxable) VAT group. Mr Southern argued that a company or group
making wholly taxable supplies should not suffer the cost of VAT; this begs the
question. In these circumstances, what is “the correct amount of tax”? If a
group which is otherwise fully taxable makes an exempt supply, it cannot expect
to avoid a VAT cost falling on it as a result of that supply. That VAT is not a
“windfall” for HMRC as the tax authority concerned. If we have recorded his
argument correctly, Mr Southern referred to C28 making an exempt supply. We do
not think that the First Appeal requires consideration of the status of
supplies made by C28; the question is whether CPUKL made an exempt supply.
246. A further issue
raised by CHL was that as the right to opt for taxation was derived from the
Principal VAT Directive, the UK as a member State should not lay down rules
governing the exercise of that right in such a way as to make it impossible or
excessively difficult for a taxpayer to exercise that right. CHL argued that in
its case, where there was no tax avoidance motive, the refusal of its
application to correct an administrative oversight in a situation where the
decision to opt to tax was made and evidenced went beyond what would be
reasonable in terms of protecting the integrity of the VAT system, and had made
it unreasonably difficult for CHL to exercise its Community right.
247.
In our view, as indicated above, HMRC’s guidance is perfectly
reasonable. It allows for the consideration of “other circumstances”. The
requirement that the taxable person should act consistently with its own
decision to exercise the option is not unreasonable; if that person has chosen
to opt to tax, it is justifiable for that choice to have the effect of
restricting the future choices of action available in respect of the property
concerned. A discretion has been conferred on HMRC under paragraph 20(2)(b) of
Sch 10. The effect of doing so is that HMRC are able to choose, on the basis of
the particular circumstances of the case, whether or not they should exercise
their discretion in favour of the taxable person concerned. As already stated
above, the only basis for questioning any such decision is where it can be
shown that HMRC could not reasonably have been satisfied that there were
grounds for the refusal. In this context, we do not consider that HMRC’s
policy, or their approach to CPUKL’s submission of its belated notification, made
it difficult or impossible for CPUKL in seeking to exercise its Community
rights.
248. In his review
letter (see paragraph 34 above), Mr Braeger considered the basis for the
assumption that output tax did not need to be charged or accounted for in
respect of the supply of the land to C28 because that company was thought to be
within the same VAT group as CPUKL. We consider that the second paragraph of
the above extract from that letter is a conclusion justified on the basis of
the information provided to HMRC as to the position of the CHL VAT group at
that time. We do not consider the third paragraph to be justified, as we accept
that a member of a VAT group may well have other reasons for exercising an
option to tax even though it intends to transfer a property to another company
in the VAT group. Although the issue raised in that paragraph was an
inappropriate matter for Mr Braeger to take into account, we do not consider
that it affected the overall conclusion. The erroneous nature of the assumption
that C28 was a member of the CHL VAT group at the time of the transfer of Unity
Mill was the reason for that transfer being regarded by HMRC as an exempt
supply.
249. Thus, viewed at
the time of the exchange of correspondence concerning the application for
belated notification, HMRC’s decision not to exercise their discretion to
accept belated notification is not, in our view, open to challenge on the basis
of s 84(7ZA)(a) VATA 1994.
250. In putting CHC’s
case on the First Appeal, Mr Southern indicated that there were four possible
analyses of the conveyancing position. These were:
(1)
That there was a direct acquisition by C28 of the legal and beneficial
interest in the land through CPUKL as a “conduit”.
(2)
That the land had been beneficially acquired by CPUKL, and transferred
on to C28, CPUKL having exercised the option to tax.
(3)
That the land had been beneficially acquired by CPUKL, and transferred
on to C28, CPUKL not having exercised the option to tax.
(4)
That the land had been beneficially acquired by CPUKL, and then there
had been an onward sale to C28 which had never been completed, so that C28 held
on a resulting trust for CPUKL.
251. As to (1), there
was no evidence to suggest that this is what had happened. He submitted that
(2) and (3) were impossible as the transfers had never been completed, so it
had been impossible for C28 to obtain a beneficial interest. Both these
analyses would only be possible if a loan could be implied between CPUKL and
C28. Leaving purchase money outstanding did not create a loan. Ms Colegrave had
stated in evidence that all beneficial interests were held in CPUKL. Mr
Southern argued that it would only be if a joint venture partner could be found
that the beneficial interest in the land would pass to C28. Thus the evidence
was only consistent with analysis (4).
252. He invited the
Tribunal to find that analysis (4) was, on the evidence before it, the correct
analysis. He submitted that the significance of this was that the First, Second
and Third Appeals would all have to be allowed.
253. Our view in
respect of these analyses is that they would raise difficult questions. We are
not convinced by Mr Southern’s argument concerning the policy on joint venture
companies. Our interpretation of Ms Colegrave’s evidence and the Board Minute
is that a decision was taken on 26 July 2007 that Unity Mill should be acquired
by C28 to allow for the possibility that at some future stage the property
might be developed through a joint venture arrangement, given the size of the
project. This would appear to imply the need for the beneficial and legal
interest to be held by C28 itself, in order to be ready for a third party to
acquire part of the shareholding in C28 pursuant to some form of joint venture
arrangement. Moving the beneficial interest at the “last minute” from CPUKL (if
that was where it resided) might give rise to tax and SDLT problems. At the
meeting with HMRC on 26 February 2010, Ms Colegrave explained that the reason
for transferring the property into a stand-alone entity (ie C28) was “. . .
that this would mean that there would be less stamp duty to pay”.
254. In any event,
the argument as to conveyancing analyses misses the point. Materials were put
in front of HMRC to enable them to decide whether they would exercise their
discretion to accept belated notification of the option to tax. They decided
not to do so. The only course open to CHL is to test on appeal whether HMRC’s
decision on the basis of the materials before them should be reversed on the
basis of a finding that HMRC could not reasonably have been satisfied that
there were grounds for the refusal. The information as to the various possible
conveyancing analyses did not form part of the materials submitted to HMRC for
them to consider in the context of their discretion. In the absence of the
great deal of additional evidence which would be required to support these
analyses, we do not consider it to be open to us to take account of what amounts
merely to speculation. Our limited comment, based on the evidence which we do
have, is that the transactions in respect of Unity Mill have been presented in the
correspondence with HMRC on the basis of a simple analysis; this was that the
land was transferred from Tetrosyl to CPUKL, the legal interest being held by
the Nominees, and then immediately from CPUKL to C28 (with the Nominees
transferring the legal title).
255. There is one
other matter which was raised in the context of the First Appeal. This is the
assessment against CHL in respect of the disallowance of VAT claimed against
development costs in respect of Unity Mill. This assessment was mentioned in
Mrs Howes’ letter to Mr Sharp dated 22 July 2010; Mr Gradwell’s letter dated 22
October 2010 indicated that the review of other matters had not covered this
assessment. No reference to this assessment was made in CHL’s Notice of Appeal
relating to the First Appeal.
256. Nothing was put
to us in argument to suggest that CHL had accepted this assessment. Further,
HMRC saw fit to raise the possibility of reviewing the decision to make the
further assessment on the basis that the review in respect of the Preferred and
Alternative Assessments and the decision not to accept the belated notification
of the option to tax had not extended to the additional assessment. The reason
given by Mr Gradwell was that HMRC’s Appeal and Review team did not consider
that CHL’s letter dated 19 August 2010 had contained a request for review of
the further assessment. It appears to us that this further assessment would
stand or fall together with the Preferred Assessment or the Alternative
Assessment, depending on the outcome of the First Appeal. Although no
application was made to us to this effect, we determine that it is appropriate
for the First Appeal to be treated as extending to this further assessment.
257. In the light of
our above conclusions, our decision in principle is to dismiss CHL’s First
Appeal. However, for the reasons set out in the “Outcome and disposition”
section of this decision, this may be affected by the outcome of the Third
Appeal, which will not be finally resolved until HMRC have decided on the
effective date of C28’s group registration application. We therefore consider
in that section how to deal with the outcome of the appeals.
The Second Appeal
258. Mr Southern
submitted that this appeal was “parasitic” on the First and Third Appeals. We
accept that submission. Everything that we decide under the present heading is
therefore subject to the matters considered in the “Outcome and disposition”
section of this decision. Our following comments are based on the working
assumption that there is a liability to VAT in respect of which a
misdeclaration penalty can be assessed.
259. In the
misdeclaration penalty notice dated 15 October 2010, HMRC stated that the
assessment of that penalty carried no implication of dishonesty. However, on
the basis of the factual information available to HMRC, a penalty was
considered appropriate. The factors leading to the mitigation by the percentage
of 65 per cent were staff problems, co-operation given, previous compliance
history, and steps taken by CHL to correct its systems.
260. In her letter of
the same date to Ms Colegrave concerning period 12/07, Mrs Howes referred to
HMRC Notice 700/42. Genuine mistakes, honesty and acting in good faith were not
in themselves accepted as reasonable excuse. Ms Colegrave, in her letter dated
19 August 2010, had asked for mitigation on the basis of CHL’s full
co-operation with HMRC on discovery of the error, and of the original error
having occurred during a state of flux in CHL’s tax department. The Reviewing
Officer who had considered Ms Colegrave’s representations concerning the
assessment had concluded, on the facts as presented, that there had been no
reasonable excuse for the error. Ms Howes and Mr Harcourt had concluded that a
penalty was due, but should be mitigated by 65 per cent.
261. Mrs Howes
indicated that a misdeclaration penalty in respect of period 07/07 was under
consideration. As there is no evidence of any such penalty having been
assessed, we confine our consideration to the misdeclaration penalty assessment
in respect of period 12/07.
262. As that
assessment related to period 12/07, and the Alternative Assessment (in the full
sum of £2,187,500) was for period 07/07, the misdeclaration penalty can only
apply if the Preferred Assessment (£1,050,000 for period 07/07 and, in
particular, £1,137,500 for period 12/07) is found to be correctly made.
263. The legislation
relevant to misdeclaration penalties is no longer current. As there was no
dispute between the parties as to its effects, we do not think it necessary to
set any out any parts of that legislation in this decision.
264. The first
question raised by the Second Appeal is whether CHL had a reasonable excuse for
the matters leading to the imposition of the penalty. For the following
reasons, we do not think so. Although information as to those companies which
were, and those which were not, members of the CHL VAT group may not have been
available to particular individuals working within the CHL corporate group, CHL
as a corporate entity was aware of that information. A document entitled “Group
Registration Record” was included in the evidence; it was attached to a letter
dated 17 June 2010 from HMRC’s VAT Registration service. It appears from the
reference to be an acknowledgment of a variation in the details of the overall
CHL VAT group registration. This sets out information concerning companies
which are, or have been, members of the CHL VAT group, including dates on which
the group registration of companies began and (where applicable) ceased.
265. Although this
document is dated June 2010, it covers the whole period since the beginning of
May 1984. It is clear from this document (and would therefore be apparent from
any similar earlier documents which might have been issued by HMRC following
other changes in the group registration) that C28 was not part of the CHL VAT group
registration.
266. As the conduct
giving rise to the penalty is that of the CHL VAT group as a whole, through CHL
as representative member, the individual staffing difficulties referred to in
correspondence and discussions with HMRC did not in our view constitute a
reasonable excuse for that conduct. CHL in that capacity was aware (or should
have been aware) that C28 was not part of the group registration. On the same
basis, CHL was aware of the need to give notification of the option to tax in
respect of Unity Mill “within the allowed time”.
267. As we do not
consider that CHL had a reasonable excuse, the remaining question is whether
the level of mitigation of the penalty allowed by HMRC should be varied. The
amount of the Preferred Assessment attributable to period 12/07 is £1,137,500.
15 per cent of that amount is £170,625. After mitigation by 65 per cent by
reference to the factors mentioned above, the penalty is £59,718.
268. The amount of
VAT assessed is substantial. It relates to transactions taking place
approximately three years beforehand. The inadvertent errors giving rise to the
VAT assessed remained undiscovered from the end of July 2007 until an
investigation was prompted by Mrs Howes’ letter sent to Mr Sharp in February
2010. We accept that, by their very nature, inadvertent errors are likely to
remain undiscovered until something alerts the relevant person to the need to
look into what has happened. In CHL’s case, no individual working within the
CHL corporate group looked at the position, nor was any question raised by
external advisers. Thus it was not until HMRC had raised questions that
anything was done by CHL to discover the position.
269. We think it
material that the process was started by HMRC, rather than by CHL. Although the
position as it has turned out to be is that HMRC became aware of the
circumstances, this is only because of the actions which they chose to take. If
they had not taken the step of making an enquiry, the potential liabilities of
the CHL VAT group to additional VAT might not have been discovered.
270. For those
reasons, we consider that the 65 per cent level of mitigation as determined by
HMRC is appropriate, and we see no reason to vary it. The penalty therefore
remains 35 per cent of the part of the Preferred Assessment applicable to
period 12/07. Our decision is, in principle, to dismiss CHL’s Second Appeal,
subject, as already indicated, to the questions considered below.
Outcome and disposition of all four appeals
271. Our decisions in
relation to the Third and Fourth Appeals are to allow them and to remit the
respective group registration applications to HMRC for them to consider from
what dates C28 and C26 should be treated as members of the CHL VAT group as a
consequence of those applications. In deciding that question, HMRC are required
to consider whether to exercise their discretion under s 43B(4)(b) VATA 1994.
We have found that such discretion is an open discretion, and that as a result
of the Third and Fourth Appeals, it is to be exercised on the basis that it should
take into account our findings as set out in this decision. As a result, we
cannot predict the outcome of those remitted applications.
272. This leads to
uncertainty as to the outcome of the First and Second Appeals. We set out below
our conclusions in respect of these on the basis of two alternative
assumptions. The first is that HMRC decide not to exercise their discretion to
register C28 as a member of the CHL VAT group with effect from 30 July 2007.
The second is that they decide to exercise their discretion to do so.
(a) The First Appeal
273. We consider the
First Appeal on the basis of the first assumption. Our conclusion is that the
supply by CPUKL to C28 was an exempt supply because the option was not notified
to HMRC within the “permitted time” under paragraph 20 of Sch 10. The Preferred
Assessment was therefore correctly made, as CHL had claimed input tax on the
basis that it had made a standard-rated supply of the Unity Mill land to C28.
As a consequence, we find that the Alternative Assessment, made on the basis
that the supply by CPUKL to C28 was a taxable supply, was inappropriate on the
basis of the facts as we have found them, and accordingly it should be
cancelled on the same basis as Mr Braeger cancelled the original Alternative
Assessment.
274. Our decision by
reference to the first assumption is that the First Appeal should be dismissed.
275. Applying the
second assumption raises difficult issues. Mr Southern’s submission was that
the effect of allowing the Third Appeal would be that the First Appeal would
automatically have to be allowed. The basis for his submission needs to be
tested.
276. Under s 43(1)
VATA 1994, any supply of goods or services by one member of a VAT group to
another member of that VAT group is to be disregarded. A decision by HMRC to
grant CHL’s application for C28 to be included as a member of the CHL VAT group
with retrospective effect (ie from 30 July 2007) would mean that CPUKL’s supply
made when it transferred the Unity Mill land to C28 would be disregarded. As
the basis for the Preferred Assessment was that CPUKL had made an exempt supply
of the land to C28 but had claimed input tax in respect of that land, it would
follow that the Preferred Assessment would have to be discharged. The
additional assessment in respect of VAT on development costs would also have to
be cancelled. (HMRC have subsequently submitted that a part of this additional
assessment would need to be preserved in order to deal with a disallowance made
in respect of input tax claimed in error as a result of the SDLT being treated
as a taxable supply; we consider this below.) In the same way, the Alternative
Assessment, based on the making by CPUKL of a taxable supply of the land to C28
at a time when C28 was not a member of the CHL VAT group, would also fall away
and would have to be cancelled.
277. However, there
were three elements of CHL’s First Appeal (and we have extended this to a
fourth). Although we have set out the results of three of these in the
preceding paragraph, a major component of the First Appeal was the appeal
against HMRC’s refusal to accept belated notification of the option. We do not
think that our conclusion on this issue, that there was no effective option to
tax, would be affected in any way by a decision to permit registration of C28
as part of the CHL VAT group with effect from 30 July 2007. Thus any further
dealings by C28 in respect of Unity Mill would still fall to be treated on the
basis that there was no effective option to tax in respect of that property. Unity
Mill was acquired by C28 as exempt land, and a further option would need to be
exercised and notified within the “allowed time” in order to render taxable any
supplies by C28 relating to that property.
278. Our decision by
reference to the second assumption is that the First Appeal should be allowed
in respect of the Preferred Assessment, the Alternative Assessment and the
additional assessment relating to VAT on development costs, but should be
dismissed in respect of the option to tax relating to Unity Mill.
(b) The Second Appeal
279. On the basis of
the first assumption, our conclusion is that the Preferred Assessment was
correctly made. In consequence, there was a liability to VAT, and for the
reasons set out above, we confirm the misdeclaration penalty in the amount
assessed.
280. If the second
assumption were to prove correct, the effect would be that no supply would be
regarded as having taken place as a result of the transfer of Unity Mill by
CPUKL to C28. Thus no liability to VAT in respect of that transfer would have
been incurred by the CHL VAT group. As a result, CHL would not have made a
misdeclaration in its return for VAT period 12/07, and the misdeclaration
penalty notified to CHL by HMRC on 15 October 2010 would have to be cancelled.
CHL’s Second Appeal would have to be allowed.
(c) Costs
281. On CHL’s behalf,
Mr Southern applied for costs in the event that CHL’s appeals were successful.
In the same way, Mr Zwart applied on HMRC’s behalf for costs in the event that
CHL’s appeals were dismissed. Having considered the position on the basis both
of the first and the second assumptions referred to above, we consider that in
the circumstances, whatever the outcome of CHL’s appeals, the appropriate
course is to make no order as to costs.
Comments from the parties on the draft decision and our views on the points
raised
282. Due to the
interaction between the results of the Third Appeal and the First and Second
Appeals, we concluded that we should seek the comments of the parties on our
decision in draft form before it was released, to ensure that it dealt in full
with the implications of all four appeals. CHL confirmed that it was satisfied
that this was the case, and did not consider that any modification or
clarification of the terms of the decision was needed. However, HMRC did raise
further points for us to consider. In a letter dated 15 February 2013 from
HMRC’s Solicitor’s Office, comments were made on the following matters:
(1)
Paragraph 276 of the decision needed to be amended to deal with that
part of the assessment which had been made to recover an amount of input tax
credit claimed in respect of an amount consisting of SDLT rather than
VAT.
(2)
HMRC expressed concern that, because of the time which would elapse
until the outcome of their consideration of the “retrospective” group
registration applications was known and CHL became aware of all relevant
considerations to take into account in deciding whether or not to appeal
against the decision on other issues, CHL might consider it necessary to seek
permission to appeal against the decision even before HMRC had
communicated to CHL their decision in respect of the remitted applications.
HMRC were concerned that the parties and the Tribunal might incur costs which
could potentially have been avoided if CHL had had the opportunity to consider
HMRC’s decision on the remitted applications.
(3)
HMRC were concerned that if they were to allow the “retrospective” group
registration application in respect of C28, a potential consequence would be
that a new point would be created where tax was due, but not covered in HMRC’s
alternative assessments, and any new assessment would be out of time. If HMRC
did not know before considering the application that such risk did not exist,
they would be obliged to take that risk into account when making their
decision. They suggested that the Tribunal should include in its decision
some mechanism to avoid the problem of circularity.
(4)
To deal with the problems referred to at (2) and (3) above, they
suggested that one solution would be for the appeal to be adjourned pending
HMRC notifying CHL of their decisions in respect of the “retrospective” group
registration applications, or at least until the potential consequences of
allowing those applications could be agreed or determined.
283. As we were about
to issue this decision in its final form, an email message from CHL’s
solicitors dated 5 March 2013 was forwarded to us on 11 March 2013. The
attachment was a letter setting out their comments, as agreed with Mr Southern,
on the matters raised in HMRC’s letter dated 15 February 2013. In their view the
difficulties raised in HMRC’s letter might be more apparent than real. Allen
& Overy continued:
“1. Either side could appeal against the decision in
the normal way, if they so wished.
2. If HMRC, after reconsideration of the
applications to group with retrospective effect, were again to decline to
accept such application, [CHL] would have aright of appeal against the fresh
decision. We do not see how [CHL] could appeal against a decision before it is
made.
3. We cannot envisage circumstances in which, if the
grouping application were allowed to take retrospective effect, there might be
an absolute loss of revenue. If the grouping election were in force, there
would be no VAT due on intra-group supplies.
4. If there were any problem with appeal time-limits
the FTT and UT have power to extend time limits under their case management
powers.
5. As regards para 276 we do not think that the
proposed amendment is required. If [CHL] did not in fact pay input tax (because
the £587,500 was SDLT not a VAT-inclusive taxable supply) there was no input
tax to recover.
It follows that we do not agree with the suggestion
at the close of the HMRC letter that the appeal should be adjourned pending a
new HMRC decision on the grouping applications.”
284. Although we had
already considered a number of these points before receiving the Allen &
Overy letter, we decided that we should reconsider our proposed conclusions in
the light of the views expressed on CHL’s behalf.
(a) Comments on paragraph 276
above
285. We deal first
with HMRC’s request to preserve the part of the additional assessment in
respect of VAT on development costs relating to the disallowance of the input
tax claim on the basis that the amount concerned was SDLT and not VAT.
286. In his letter to
Mrs Howes dated 27 May 2010 Mr Sharp included the following information:
“Stamp Duty Land Tax
Stamp Duty Land Tax of £587,500 was paid by [C28] in
August 2007 following the transfer of the land from [CPUKL]. The SDLT was
determined on the VAT inclusive amount of £14,687,500.
VAT claimed on expenditure
Following acquisition, additional development
expenditure has been incurred on the land, of which £158,763 of input tax has
been claimed. The attached appendix, details the value for each claim to date.
Included within this amount, VAT amounting to £87,500 has been claimed in error
which is the result of the SDLT being treated as a taxable supply.”
287. In her letter
dated 22 July 2010, Mrs Howes stated:
“There is also the matter of the VAT claimed against
development costs. These were listed in the schedule attached to your e-mail of
9 June 2010 which was not enclosed with your letter of 27 May 2010. You have
informed me that included in the amount of £158,763 is £87,500 which was input
tax incorrectly claimed and calculated against SDLT. I calculated the total to
be £158,766.00.
I am writing to let you know I will be disallowing
the claims. I have not enclosed a Notice of Assessment for £158,766.00 but a
Notice of Assessment will follow . . . I am disallowing the VAT on the basis
that it is either attributable to an exempt supply of the land or attributable
to the development costs of [C28], which is not in the VAT Group. In the case
of the £87,500 this is non deductible because it is not VAT.”
288. Ms Colegrave, in
her letter dated 19 August 2010 requesting reconsideration, stated:
“Further, regarding the proposed assessment of
development costs recovered by the VAT group, it is our view that these costs
do relate to the onward supply of the property or the onward supply of
development services which will be made by the VAT group to [C28], therefore,
it is our view that any assessment against this amount would not be appropriate
save for the £87,500 which relates to incorrectly claimed in relation to VAT [sic].”
289. On the basis of
this exchange of correspondence, we are satisfied that CHL erroneously made
this part of its input tax recovery claim, and that it acknowledged its
liability in respect of this error. The quantification of the amount
incorrectly claimed is not clear to us, as £87,500 is just under 15 per cent of
the SDLT concerned (£587,500). We do not have specific evidence as to the date
of CHL’s input tax claim, and so are not in a position to make any finding as
to the applicable rate.
290. Despite CHL’s
comments in its submission to us dated 5 March 2013, our conclusion is that if
the alternative assessment in respect of development costs were to be cancelled
in its entirety, as referred to in paragraph 276 above, the result would be
that CHL’s excessive recovery of input tax incorrectly claimed on the basis of
treating the SDLT as a taxable supply would escape assessment. In our view,
this would be an inappropriate consequence of the First Appeal being allowed.
291. We therefore
accept HMRC’s submission that, if the First Appeal were to be allowed, the
additional assessment in respect of development costs would also have to be
cancelled, except to the extent that it was issued to recover the amount of
input tax disallowed in respect of the erroneous claim based on treatment of
the SDLT as a taxable supply. Our conclusion at paragraph 276 above is
therefore to be read as subject to the final part of the previous sentence of
this paragraph.
(b) Issues concerning
dispositions of the appeals
292. Having
considered HMRC’s comments, as well as the responses made on CHL’s behalf, we
do not think that the solution set out at sub-paragraph (4) of paragraph 282 above
would be effective. To give the appropriate force to the directions to HMRC to
consider afresh whether the “retrospective” group registration applications
should take effect from: (a) the dates on which they were received by HMRC, (b)
on the dates requested by CHL, or (c) on other dates, it is necessary to have
final decisions from this Tribunal on the Third and Fourth Appeals. If these
two appeals were to be adjourned, no final decisions would have been made. Our
view is that the Third and Fourth Appeals must be finally determined by this
decision, and that the period for either party to apply for permission to
appeal in respect of those appeals should be the normal period of 56 days from
the date on which this final version of this decision is sent to that party.
293. We agree with
CHL that if, after reconsideration, HMRC were to decline to accept either or
both of CHL’s “retrospective” group registration applications, CHL would have a
right of appeal against the fresh decision. This would be an entirely new
appeal, and not part of the present proceedings.
294. As the Third and
Fourth Appeals have been determined in CHL’s favour, even though the practical
outcome is dependent on the results of HMRC’s reconsiderations of the
respective group registration applications, it appears to us unlikely that CHL
would be seeking to appeal against our decisions (or any part of them) in
respect of those two appeals. Whether HMRC might seek to apply for permission
to appeal against those decisions is a matter for them, but if so this would
have the effect of calling into question the outcome of all four appeals.
295. In relation to
HMRC’s point (3) set out above, the circumstances in which a new charge to tax
would arise are not clear to us (nor are they clear to CHL and its advisers).
However, we do not find it necessary either to investigate the position or to
speculate on it. As we have indicated, one of the factors which is relevant to
HMRC’s decision whether to exercise their discretion to permit late
registration is the protection of the revenue. As HMRC will be considering
afresh the applications originally made in November 2010 and February 2011, it
appears to us inevitable that they will have to take into account the potential
risks of tax being lost as a result of the time limit for any replacement
assessments having passed.
296. As the outcome
of the First and Second Appeals is largely dependent on HMRC’s decision in
relation to the group registration application for C28, we accept that a
difficulty arises as set out in HMRC’s point (2) above. We consider it
inappropriate for any possible appeal against our decisions in respect of these
two appeals to be pursued until their actual outcome is known. As the event
which will establish their outcome is notification by HMRC of the date from
which the group registration of C28 is to take effect, we consider that the
appropriate course is for the period for either party to apply for permission to
appeal in respect of those appeals to be amended to 56 days from the date on
which notification of the effective date of such group registration is received
by the Tribunal from HMRC. (This should correspond to the date on which such
notification is received by CHL.)
297. In arriving at
that view, we have considered rules 39 and 5 of the Tribunal Rules. Rule 39(2)
provides for the normal time limit of 56 days from the date on which full
written reasons for the decision are sent to the person making the application
for permission to appeal. However, rule 39(4)(b) makes clear that the
Tribunal’s power to extend time under rule 5(3)(a) applies to applications for
permission to appeal. Further, in the present case, our decisions in respect of
the First and Second Appeals have been produced in advance of the time required
by rule 35(2), as those decisions fall outside the terms of rule 35(2):
“(2) The Tribunal must provide to each party within
28 days after making a decision which finally disposes of all issues in proceedings
. . . , or as soon as possible thereafter, a decision notice . . .” [our
italics]
298. Clearly, our
decision does not finally dispose of all issues in proceedings concerning the
First and Second Appeals, and cannot do so until HMRC’s decision in respect of
the effective date of the group registration of C28 is known. Any application
made within 56 days of the release of this decision and before HMRC’s decision
in respect of the date of such group registration would therefore be premature.
As HMRC stated in their letter referred to above, if the normal 56 day period
under rule 39(2) were to apply in respect of the part of our decision relating
to the First and Second Appeals, there would be a risk of costs being incurred
in circumstances where they could have been avoided if CHL had had the
opportunity to await the outcome of the group registration application. Having
regard to the overriding objective in rule 2 of the Tribunal Rules that the
Tribunal is to be enabled to deal with cases fairly and justly, and given the
circumstances relating to the First and Second Appeals, we are satisfied that
the appropriate course is to vary the time limit under rule 39(2) by amending
the time from which the 56 day period is to run.
299. In the light of
such circumstances, we direct that the time limit for either party to apply for
permission to appeal in respect of the First and Second Appeals is 56 days from
the date on which notification from HMRC of their decision on the reconsidered
group registration application relating to C28 is received by the Tribunal.
Right to apply for permission to appeal
300. This document
contains full findings of fact and reasons for the decision. Any party
dissatisfied with this decision has a right to apply for permission to appeal
against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal)
(Tax Chamber) Rules 2009. In the case of the Third and Fourth Appeals, the
application must be received by this Tribunal not later than 56 days after this
decision is sent to that party. In the case of the First and Second Appeals,
the application must be received by this Tribunal not later than 56 days after
the date on which notification of the result of the group registration
application as reconsidered by HMRC is received by the Tribunal. The parties
are referred to “Guidance to accompany a Decision from the First-tier Tribunal
(Tax Chamber)” which accompanies and forms part of this decision notice.
JOHN CLARK
TRIBUNAL JUDGE
RELEASE DATE: 18 March 2013
