A Precautionary Tale for Office Holders

Property transactions are inherently complex, and the VAT implications of incorrect treatment can be substantial. Failing to investigate potential VAT issues not only has implications for the company but could also expose a director to personal penalties.

Although the sale of commercial property is generally exempt from VAT, a taxpayer may opt to tax and thus converting the supply of the property from exempt to standard‑rated. Here, the taxpayer had opted to tax the property in 2002 and recover the VAT on its purchase, failing however to charge and account for VAT on rents to tenants or the eventual sale, which took place in 2016.

HMRC argued that VAT should have been applied both to rental income and to the sale, and issued an assessment for the undeclared VAT. It also issued a penalty on the basis that the under‑declaration was deliberate and served the director with a Penalty Liability Notice (’PLN’) making him personally liable for 90% of the penalty.

A PLN is a powerful mechanism enabling HMRC to transfer a company’s penalty to an individual where it is determined that their behaviour is deliberate, dishonest, or reflects ’blind‑eye knowledge’.

Blind‑eye knowledge (also known as ’Nelsonian knowledge’) describes a situation where a person suspects something may be wrong but deliberately avoids confirming it.

In this case both the director and the accountant sought to clarify the VAT position in the run up to the sale. Although HMRC had issued a letter prior to the sale confirming that the option to tax had been exercised, the Tribunal accepted that neither had seen the letter prior to the sale. Despite not seeing the confirmation the accountant notified the director that it was likely that the company had opted to tax the property and the director communicated this possibility to the lawyer handling the conveyancing. However, because no conclusive evidence confirming the option to tax had been received, and due to financial pressures to make the sale, the director decided to proceed with the sale without charging VAT.

The director firmly rejected the suggestion that his conduct had been deliberate. He maintained that he had always acted in good faith and had derived no personal benefit from the company’s failure to account for VAT. At no point, he said, did he intend to mislead HMRC. According to the director, his actions were neither reckless nor deliberate. He relied on professional advisers, sought clarification as soon as the VAT issue arose, and attempted to establish HMRC’s position – though no clear response was provided.

The Tribunal accepted that he lacked direct knowledge but concluded that he nevertheless possessed ’blind‑eye knowledge’, making the failure to charge VAT a deliberate act. His decision not to follow up with HMRC was taken as evidence that he suspected the property was opted and chose not to confirm it. On that basis, the Tribunal dismissed the appeal and upheld the Personal Liability Notice issued to him.

The case reinforces a long‑standing principle: a director cannot rely on ignorance where there are indications that VAT may apply. Directors are expected to take reasonable steps to understand the VAT position, seek appropriate advice, and ensure the company’s tax affairs are properly managed. In the Tribunal’s view, choosing not to ask questions can amount to deliberate behaviour.

For any business involved in property, this case is a timely reminder to ensure that VAT positions are properly understood, documented, and reviewed. Given the significant amounts usually involved in property transactions, the cost of failing to do so can be high for both the entity and the office holder.

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