Directors whose companies fail to make accurate VAT returns can expect to receive stiff financial penalties – but only if such failures are deliberate. In a guideline case, a tax tribunal adopted a narrow interpretation of that word in relieving an alcohol wholesaler’s sole director of a six-figure bill.

Following an investigation, HM Revenue and Customs (HMRC) formed the view that the wholesaler had entered into numerous transactions that were connected with the fraudulent evasion of VAT. Assessments in respect of potential lost revenue were raised against the company, together with a deliberate inaccuracy penalty.

The company withdrew an appeal against the assessments after entering liquidation. HMRC, however, went on to raise a personal liability notice (PLN) against its sole director on the basis that the inaccuracies in its VAT returns were wholly attributable to her. The PLN demanded that she pay a sum in excess of £900,000.

Ruling on her challenge to that bill, the First-tier Tribunal (FTT) had no doubt that the company should have known that the relevant transactions were connected to VAT fraud. It noted that due diligence documents relating to some suppliers, many of them newly established and having minimal apparent resources of their own, were littered with warning signs. There was no evidence that any critical thought was given as to whether or not to trade with a particular supplier.

Allowing the director’s appeal against the PLN, however, the FTT emphasised that the burden of proof rested on HMRC. It noted that the test for whether an inaccuracy in a VAT return is deliberate is a subjective one: it is not a question of whether a reasonable taxpayer might have made the same error, or even whether a taxpayer failed to take reasonable steps to ensure that a return is accurate. What mattered was the knowledge and intention of the particular taxpayer at the time.

The FTT was ultimately not satisfied on the evidence that the company actually knew that the transactions were connected to fraudulent VAT evasion. In the absence of such knowledge, the inaccuracies in its VAT returns were not deliberate. Given that a penalty can only be levied personally against a director in the event of such deliberate inaccuracy, the PLN stood to be set aside.