Can a Director be personally liable for a VAT penalty?
A recent VAT case heard at the first tier tribunal acts as a stark reminder of the risks taken on by sole directors when completing company VAT returns.
The case was Jason Andrew (TC05068) and the decision was published at the end of April this year. To give you a flavour of the case, it started with dubious advice being given to Mr Andrew, the appellant in the case, by a mysterious stranger he had met in the pub. The stranger advised Mr Andrews on a money making scheme involving the trade in airtime minutes. Mr Andrew acted on the advice and incorporated a company becoming both sole shareholder and sole director.
It may be worth pausing there and reminding readers that they should take care when taking financial or business advice from a stranger in the pub!
Shortly after incorporating the company, Mr Andrews registered it for VAT. The first two VAT returns submitted were nil returns…nothing unusual so far. The third VAT return showed a significant jump in activity with sales of £2,444,870.00 and purchases of £2,439,877.00. The input tax reported on the return was in the amount of £487,975.50.
This was in contrast to the information presented on the VAT application form which showed an expected annual turnover of only £80,000.00. The significant difference lead to alarm bells ringing with HMRC. As a result HMRC asked to visit the business and interview the director.
Although you are not expected to know exactly what your turnover is when registering for VAT, you should have a ball park idea. If you are out by more than 3,000% you have to expect a few questions from HMRC.
On being interviewed Mr Andrew stated that the Company's sales were of “airtime minutes” and had been carried out by this mysterious individual known to him as “James”. Mr Andrews followed this by stating that James was now uncontactable.
To add to this, Mr Andrew was unable to produce any contracts, agreements, bank statements or purchase invoices showing that supplies were made to the company or by the company. He indicated in a subsequent interview that he had completed the VAT returns on the basis of figures sent to him by James via email.
A VAT registered business is obliged to retain these business records for at least six years. Claims for input tax must only be made when the business holds evidence of the charge to VAT, in most cases this evidence will be a valid VAT invoice.
What followed was a quick dissolution of the company in the hope that Mr Andrew could put the whole episode behind him. Unfortunately for Mr Andrew that wasn’t to be the case.
When penalties relate to a deliberate error and that error is attributable to an officer of the company, it is possible for HMRC to pursue the officer for all of the penalties. This can happen in situations where, for example, the officer has gained personally or if the company is, or is expected to become, insolvent.
Since Mr Andrew was a sole shareholder and sole director with no employees, he was not able pass the buck to someone else. It might have been possible to attribute the error to the mysterious stranger, but he was nowhere to be found and would hardly be considered an officer of the company in any case. In other words it is easy to argue that deliberate errors are attributable to sole directors in such situations, which means they could personally be saddled with 100% of the penalty, as was the case with Mr Andrew.
In fact, the law is so wide in scope that the term ‘officer’ of the company can include a director, secretary, manager or any other person managing any of the company’s affairs, i.e. even if they are not a manager in title.
Just to reiterate, it would need to be a deliberate error, such as an understated amount of output tax. This can be a lot easier to commit than most people realise. For example, a director may decide to use a later date on a sales invoice to push a transaction into the next quarter’s VAT return and improve cash-flow, when the actual tax point or ‘time of supply’ fits into an earlier VAT period.
I do not get asked the question a lot, but next time you wonder whether a director can be held accountable for a VAT penalty, remember that the answer is yes. In fact a director, secretary or manager can be held personally accountable for a VAT penalty.
It pays to get good advice, and the best advice is rarely found at the local pub. If you want to have a chat about VAT, feel free to drop in to one of our offices. We only serve hot tea and coffee and good advice.
If you require further information on this topic please speak to your MHA MacIntyre Hudson advisor, alternatively you can contact your local office or send an enquiry.