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Workaholic Director’s Careless Approach to VAT Liabilities ‘Not Dishonest’

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Workaholic directors who are not good at delegating may take a slapdash approach to paperwork – but that does not make them dishonest. The First-tier Tribunal (FTT) succinctly made that point in relieving a businessman and his company of substantial tax penalties.

Faced with the company’s failure to submit VAT returns over a period of more than six years, HM Revenue and Customs (HMRC) issued it with estimated quarterly VAT bills, most of which were paid. It later transpired that the bills underestimated the company’s turnover, and thus its VAT liabilities, by more than 50 per cent.

HMRC took the view that the company, which subsequently entered into a creditors’ voluntary arrangement, had evaded more than £370,000 in VAT. Penalties were raised against the company and its director on the basis that the latter’s conduct involved dishonesty. HMRC asserted that he knew that, had the company filed returns as it should have done, its liability for VAT would have been very much greater. Both company and director appealed against the penalties.

Ruling on the matter, the FTT had no hesitation in finding that the director was solely responsible for dealing with the company’s VAT affairs and that he was fully aware of the VAT system and the company’s obligation to pay the right amount of VAT at the correct time. It noted, however, that he was a somewhat harassed workaholic who took a hands-on approach and was averse to delegating.

Pouring his heart and soul into the business, he took a ‘blitz’ approach to paperwork and had little time to focus on non-trading activities, including the company’s VAT obligations. His approach to those obligations was careless and probably reckless and his cursory signing off of the company’s accounts, without reviewing them in detail, was reprehensible.

In upholding the appeals, however, the FTT found that he had not acted dishonestly. He did not actually know that HMRC’s estimated assessments understated the true amount of VAT due. He simply paid the bills in front of him in the belief that he was thereby discharging the company’s liabilities. There was no deliberate strategy either to underpay VAT to support the company’s working capital or to divert to other creditors money that should have been paid to HMRC.