Ali (t/a Vakas Balti) v HM Revenue & Customs

A civil evasion penalty for dishonest VAT evasion under section 60 of the Value Added Tax Act 1994 may be assessed by reference to VAT actually evaded or sought to be evaded. It is not confined to the amount of VAT finally determined as payable for the accounting period.

The final determination of VAT under section 77(2) fixes the time by which a penalty assessment may be made. It does not require a prior tax assessment, nor does it prevent a penalty assessment being made before final determination. Tax and penalty assessments remain distinct procedures, although they are linked and may be issued together.

The taxpayer operated a restaurant and accepted that he should have registered for VAT from August 1996. He dishonestly suppressed sales. The Commissioners made an original assessment for £6,971.95 and then purported to amend it to £14,284. The amendment was invalid because the statutory scheme did not permit amendment and it was too late to make an additional assessment.

The VAT and Duties Tribunal upheld a civil evasion penalty calculated by reference to £14,284. Hart J allowed the taxpayer’s appeal on that issue, holding that a penalty could not be imposed in respect of VAT for which the taxpayer was not liable to pay: [2006] EWHC 23 (Ch). The Commissioners appealed. The central issue was whether section 60 permitted a penalty based on VAT evaded exceeding the VAT finally determined as due.

1. Appeal allowed. The court restored the Tribunal’s decision that the civil evasion penalty could be calculated by reference to £14,284, subject to the 10% mitigation deduction.

2. Section 60(1) of the Value Added Tax Act 1994 imposes a sanction for dishonest conduct undertaken to evade VAT. It is not merely a consequence of a presently enforceable tax debt. The language of VAT “evaded” and VAT “sought to be evaded”, together with section 60(3)(a) and the mitigation provisions, showed that a penalty may arise even where no VAT has been lost.

3. There was no express statutory link making the amount of VAT evaded for section 60 purposes identical to the amount eventually fixed as payable on a tax assessment or appeal. The construction urged by the taxpayer would materially restrict the sanction where dishonesty was established but the Commissioners could no longer make a valid further tax assessment. That result was inconsistent with the statutory purpose.

4. Section 77(2) means that VAT has been finally determined when the amount payable has been fixed, whether by an unchallenged assessment, appeal, or otherwise. It gives the Commissioners a further two years after that event to assess a penalty. It neither makes final determination a condition precedent to a penalty assessment nor displaces the ordinary ability to issue a penalty assessment at the same time as, or before, a tax assessment.

5. A penalty assessment cannot itself reopen an existing tax assessment. Tax and penalty procedures are nevertheless distinct, have different time limits, and may proceed separately. The court did not decide whether issue estoppel or abuse of power could prevent a penalty assessment based, without new evidence, on an amount previously rejected by a tribunal.

• Court of Appeal (Civil Division): Allowed the Commissioners’ appeal and reinstated the Tribunal’s penalty decision: [2006] EWCA Civ 1572.

• High Court, Chancery Division (Hart J): Allowed the taxpayer’s appeal on the penalty point, holding that the penalty could not exceed VAT for which the taxpayer was liable: [2006] EWHC 23 (Ch).

• VAT and Duties Tribunal: Dismissed the taxpayer’s appeals and upheld the civil evasion penalty by reference to £14,284 notwithstanding the invalid amended tax assessment.