Kidease Ltd v Her Majesty's Revenue & Customs

Facts

Kidease Ltd applied to be registered for VAT from 1 February 2001, describing its main business activity as childcare and the provision of workplace nurseries. Its only employees were its two directors, Mr Atkey and Mrs Pattrick, who quickly secured management consultancy projects on the strength of their previous work experience; the company in fact did no childcare work until the period 01/03, when it opened a children's nursery at Milford-on-Sea in Hampshire. In January 2002 Mr Atkey wrote to HMRC about reclaiming VAT on childcare expenses, toys, equipment and building costs, and was told in a reply dated 29 January 2002 that a business making both taxable and exempt supplies is partly exempt and must normally use an approved partial exemption method; Notice 706 was enclosed. The company's book-keeper, Mr Spinthiras, telephoned HMRC on 24 October 2002 and again on 30 October 2002, when he was told the VAT on a computer and on an extension to the nursery could be reclaimed. Following a visit by Officer Sean Barrett on 29 January 2003, HMRC assessed the company on 30 May 2003 in the sum of £17,172 plus interest for the periods 04/01 to 01/03, and on 6 October 2003 imposed a misdeclaration penalty of £2,023 for the periods 04/01, 07/01, 07/02 and 10/02. Kidease appealed both, relying on HMRC's allegedly erroneous advice.