VAT Tribunal Reports

JOHN NEWTH analyses two recent cases.

Testing the water

Six applications came before the VAT tribunal, of which the chairman was Stephen Oliver QC. All of them concerned Human Rights issues and were heard before the Court of Appeal had given its decision in Han and Yau which is now reported at [2001] STC 1188.

Accordingly, the tribunal had deferred publishing his decision on the applications, which were only relevant if penalties under section 60, Value Added Tax Act 1994 were properly to be classed as 'criminal' in nature for the purposes of Article 6 of the European Convention on Human Rights.

All the applications concerned procedural rules for disclosure of documents under the VAT Tribunal Rules (Statutory Instrument No 590 of 1986).

The facts of various cases were that the applicants had penalties imposed on them as follows:

• Nene Packaging Limited was assessed to a 20 per cent penalty of £9,677 plus interest under section 60(1), VAT Act 1994 following a voluntary declaration of under-declared tax of £48,388.
• Ponte Sousa - in this case the appellants ran a Fish and Chip Shop in Wallingford, Oxfordshire. A penalty of £78,072, being 92 per cent, had been imposed.
• Spankie and Spankie - the appellants ran a public house and failed to account for VAT on another part of the business which provided catering services. The tax underdeclared was £5,274 and an 85 per cent penalty of £4,477 was imposed.
• A M Rahman - the appellant ran a London Restaurant and sales had been suppressed resulting in an under-declaration of £61,099 plus interest. A 40 per cent penalty of £24,436 had been imposed. In this case appeals had been made on the basis that the penalty was criminal in nature and Customs had failed to inform Mr Rahman of his fundamental right to legal representation. In addition, evidence had been obtained in contravention of the safeguards given by the Police and Criminal Evidence Act 1984. This evidence should therefore not be adduced. Finally it was submitted that VAT Notice 703 was structured in such a way that led to a double indemnity by way of penalty.
• Curtis-Watkins - in this instance Mrs Curtis-Watkins, who ran an antique shop in Ascot, was assessed to a penalty of £4,057, being 25 per cent of the VAT arrears on undeclared takings.
• Piers Collins - Mr Collins was a motor trader and VAT arrears amounted to £11,146. A penalty of 30 per cent, totalling £2,784, was imposed.

The crux of the case was that the appellants should be treated for procedural purposes as making criminal appeals. This meant that a list of documents set out in the appeal summary should be disclosed. Disclosure would facilitate the speedy and just determination of the appeals. Failure to disclose forthwith would be a violation of Article 6.3 of the European Convention of Human Rights which entitles the person charged with a criminal offence to be informed promptly and in detail 'of the matters alleged against him'. The denial of disclosure would be equivalent to denying the particular appellant access to 'the court file' and that had been held to amount to a violation of an accused's right to a fair trial under Article 6 in Foucher v France [1997] 25 EHRR 234. The tribunal chairman observed that Article 6.3 provides certain minimum rights for those facing criminal charges and he observed that, following the Court of Appeal decision in Han and Yau, section 60 penalty proceedings are to be classed as criminal in nature for the purposes of Article 6.3.

Customs and Excise had submitted that notwithstanding the decision in Han and Yau, the Tribunal Rules applied. Applying the Tribunal Rules to the applications in Nene Packaging and to associated applications was superfluous. Applying the Tribunal Rules to the applications in M K Rahman and associated applications was premature. The Tribunal Rules adequately protected the six appellants.

Mr Oliver agreed with Customs and Excise that the disclosure of the items sought in that application in the manner laid down by the Tribunal Rules enabled a fair hearing of the various appeals.

The second application was based on the criminal proceedings rules covering disclosure by the prosecution contained in the Criminal Procedure and Investigations Act 1996. This requires the prosecution to make 'primary disclosure' of all previously undisclosed evidence which in the prosecutor's view might undermine the case for the prosecution. The prosecution must then make 'secondary disclosure' of all previously undisclosed material 'which might reasonably be expected to assist the accused's defence as disclosed by the defence statement'.

Customs and Excise considered that such an application was premature and might well prove to be completely unnecessary. Once again, the department considered that the Tribunal Rules and particularly Rule 20(3) complied fully with the requirements of Article 6 in that it enabled an appellant to obtain all relevant documents which Customs held or could obtain.

The tribunal considered that Customs and Excise were again correct and the case of Bendenoun v France [1994] 18 EHHR 54 was relevant.

Applications 3 and 4 concerned notice of any claim to a right or duty to withhold from the appellants any document or part of a document and the grounds upon which that claim was based or details of any application made or to be made to the tribunal for a right not to disclose to the appellant any document, part of a document or any information.

Once again, Mr Oliver considered that these applications were premature.

In the circumstances of the case his final determination was that the applications pending in Nene Packaging, Spankie and Spankie and Ponte Sousa cases were refused pending some indication from the appellants as to what further documents they considered relevant. In the other cases, the applications were refused pending service of the list of documents of Customs and Excise and an indication by the appellants in those cases as to what further documents they wished to see.

(Nene Packaging Limited; K M Curtis-Watkins; P Collins; A Ponte Sousa and M A Ponte Sousa (a partnership); A M Rahman; and D R M Spankie and B Spankie (a partnership) (17365).)

A good attempt

The three appellants carried on a partnership which consisted of letting on hire funfair rides and amusement machines at Porthcawl, Mid Glamorgan. One of the partners was also in business as a sole proprietor, which was important in the context of the appeal.

The appeal concerned an assessment to VAT of £119,000 plus interest of £2,139.55 in respect of notification from Customs and Excise that the partnership had to withdraw from the cash accounting scheme.

The assessment related to a transaction whereby the partnership entered into a contract with the business owned by one of its partners for the sale of a funfair ride known as a Mega Blitz. The invoice price was £680,000 plus VAT of £119,000.

Customs and Excise considered that the sale of this asset should be included when determining turnover limits for exclusion from the cash accounting scheme. The sale price of the Mega Blitz alone exceeded the limit of £437,500 per annum and the appellants were notified by letter that they had to withdraw from the scheme. Turnover in the prescribed accounting period to 31 August 1997 (excluding the sale of the asset) was £305,416.

Customs suspected that the purpose of the transaction was to obtain a cash flow advantage of the sole trader reclaiming the input tax on the invoice and the appellant partnership paying output tax under the cash accounting scheme. This was denied by the appellants, but it was not necessary for the purpose of the appeal to make any finding on this point.

Counsel for the appellants contended that the effect of the cash accounting scheme was to change the chargeable event from the invoice date to the date of receipt of cash. However, Article 10(2) of the European Community Sixth Directive provides that 'the chargeable event shall occur and the tax shall become chargeable when the goods are delivered …', but goes on to state that Member States may derogate from that provision.

He contended that the United Kingdom has used this derogation by enacting paragraph 2(7) of Schedule 11 to the VAT Act 1994, which together with Regulation 57 of the VAT Regulations 1995 have a combined effect of moving the time of supply to the receipt of cash. However, counsel for Customs and Excise contended that the effect of the cash accounting scheme was to move only the date upon which liability to pay the tax arises. The tribunal agreed with Customs on this point.

However, the main point of the appellants was that, in calculating taxable supplies for the cash accounting limit, supplies of capital assets are excluded. For the appellants it was contended that Customs VAT Notice No 731 impliedly excludes supplies of capital assets in calculating the limit for leaving the scheme. However, the tribunal held that Regulation 60 of the VAT Regulations 1995, dealing with leaving the scheme, cannot impliedly exclude supplies of capital assets, whatever may be the legal position on excluding them for the registration limits.

The tribunal felt that it was unsatisfactory that Notice 731 was not amended at the same time as the change in the VAT Regulations. The appellants, through their accountants, appeared to have relied on the unamended notice in thinking that supplies of capital assets were excluded, or it may be they thought that even if supplies of capital assets were included this did not matter so long as the £350,000 limit was not exceeded in the following year.

However, this was not a matter over which the tribunal had any jurisdiction. It was also mentioned that the references to turnover in some places in the Notice gave the impression, wrongly, that supplies of capital assets were excluded from the limits. However, on the basis of the law and VAT Regulations, the appeal was dismissed.

(C Evans, Mrs E M Evans and P C Evans trading as Coney Leasing (17510).)

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