Case: Late VAT registration penalised

First-tier Tribunal.

Judge Nigel Popplewell; Mr Simon Bird.

Decision released on 7 December 2018.

Value added tax – Sale of counterfeit items - Appeal against: (1) HMRC’s decision to register the taxpayer compulsorily under Value Added Tax Act 1994 (VATA 1994), Sch. 1, para. 1 and (2) an assessment under VATA 1994, s. 77(4) - Jurisdiction - Timing and best judgment - Evidence to challenge decision and assessment – Taxpayer’s appeal allowed in part.

Edgell [2018] TC 06853


On 7 June 2011, Mr Edgell was brought to the attention of the Trading Standards service when BMW alleged that he was selling counterfeit BMW accessories on eBay and his websites. Test purchases were made by:

(1)BMW, who confirmed that the purchases were counterfeit; and

(2)Trading Standards officers from eBay, where Edgell was predominantly supplying counterfeit BMW accessories under his eBay username.

During the investigation, it emerged that Edgell used both his address and his mother’s address to run his business. Search warrants were served on both premises and items, including computers, labels, labelling machines and padded envelopes, were seized. Following the execution of the warrants in November 2011 and subsequent searches, Trading Standards made a further test purchase of a BMW gear knob, which was counterfeit. The second warrant was obtained and executed in March 2012 and further car accessories were detained. During execution of one of the warrants, Edgell's business records, which he kept in notebooks, were seized by Trading Standards, who subsequently destroyed them.

Information, which was supplied by eBay, was analysed by HMRC, who produced PayPal summaries. These figures were accepted by the court and not disputed by Edgell at his prosecution, on 18 February 2014. He pleaded guilty to 27 charges under the Trade Marks Act 1994 and three charges of benefit fraud at Bristol Crown Court. Also, he asked for a further ten Trade Mark Act offences to be taken into account relating to further items taken from his house.

During 2014, HMRC learned of this prosecution, and the value of the counterfeit goods which had been allegedly sold. HMRC noted that he was not VAT registered, and so during 2016 investigated whether he should be registered. He provided HMRC with turnover figures (in a letter to them of 3 July 2016), which he contended supported this. However, he failed to produce any records either:

(1)to prove the turnover figures that he had provided, or

(2)to disprove the sales value used in the prosecution by Trading Standards.

On 8 December 2016, HMRC wrote to Edgell stating that they considered that he should have registered and that they intended to use the sales figures of £427,000 as the basis for calculating the date when he should have registered.

Where no application was made by a taxpayer for cancellation of registration, usually HMRC cancel registration from the date on which trading ceased. Here HMRC took that date as 29 February 2012. Based on information obtained from Trading Standards, HMRC decided that Edgell had started trading in January 2008. There were about 49 months between this date and February 2012. Thus, HMRC divided the sales figure of £427,000 by 49 to arrive at a notional monthly turnover figure of £8,714. On this basis, HMRC calculated that the turnover had exceeded the then registration threshold of £64,000 at the end of August 2008 Thus, he was required to be registered from 1 October 2008.

In a letter dated 23 January 2017, HMRC informed him they considered the net amount due from him was £45,287. This was output tax of £53,279 less input tax of £7,992, which was calculated as 15% of the output tax and which HMRC considered to be reasonable in the absence of any records. On 7 February 2017, HMRC reduced the penalty to £6,114 to reflect mitigation of 10%.

A taxpayer may appeal against certain assessments. However, he cannot appeal against an assessment which is made for a period for which he has made no return, although he can appeal against:

(1)HMRC’s decision that he is liable to be registered, and

(2)a penalty for late registration.

Furthermore, he can appeal if an assessment was made more than 20 years after the end of the prescribed accounting period or the event giving rise to the penalty (VATA 1994, s. 77(4)).

HMRC must show not only that the assessment was made within the 20-year period, but it was also made:

(1)in accordance with the one-year rule (i.e. a VAT assessment must be made within one year after HMRC knew of evidence of facts that sufficiently justified making it), and

(2)made to best judgment.

If HMRC establish that a VAT assessment was made to best judgment, then the onus is on the taxpayer to show that the decision to register is wrong.

The FTT held that wrong the turnover figures were used when HMRC decided to register the taxpayer, which required recalculating the date on which the liability to register arose. That might have a knock-on effect on the amount of the VAT assessment and the penalty.

The one year rule

HMRC were aware of the Trading Standards investigation, and the level of sales of counterfeit goods, during 2014.

The FTT considered whether the evidence of these facts (namely the Trading Standards investigation and the value of counterfeit goods) was sufficient in HMRC’s opinion to justify making the assessment at the time that they became aware of those facts. If so, the assessments were out of time, since they were notified on 25 January 2017 which was over 12 months after HMRC became aware of the Trading Standards investigation and the value of the counterfeit goods.

HMRC argued that they were able to make the assessment until at least 14 October 2016, being the date given to him to provide further information regarding his liability to be registered.

The correspondence shows that during the first half of 2016, HMRC sought further information from him about his turnover, along with justification, if any, as to why he should not have registered. For example, on 20 May 2016 he was given “a further 30 days” to contact PayPal to obtain monthly sales figures which were needed to complete a turnover template which had been given to him by HMRC on 29 April 2016. He was warned that, if he failed to get this information, HMRC would set the average sales figures which they had received from the Trading Standards investigation, across a period of trading starting on 4 January 2008 and ending on 18 March 2012. He supplied certain figures, but he was unable to provide satisfactory corroboration to HMRC. Thus, HMRC based the assessment on Trading Standard’s figures using best judgment. Thus, the FTT held that the assessment and the decision that he should have registered from 1 October 2008 were made within the time limits (para. 25 of the decision).

Best Judgment

The FTT held that the assessment was made to HMRC's best judgment. The threshold is a low one. HMRC must show that they have come to a reasonable decision based on the material before them. They used the figures from the Trading Standard’s investigation. They gave him ample opportunity to provide alternative figures and for evidence on which those alternative figures were based. They made an honest attempt to make a reasoned assessment of the VAT payable.

If an appellant challenges the registration date, he must provide evidence on the basis of which it can be said that it is more likely than not that the decision to register him from a certain date (in this case 1 October 2008) was wrong.

He claimed that some of the items, which he sold via PayPal, were personal goods, e.g. CDs, DVDs, sofas, cars and a printer. However, he gave no evidence as to the price paid. This was unsurprising, as his records which were contained in A4 and A5 notebooks were confiscated by Trading Standards during their investigation, and then destroyed following the prosecution. However, the appellant must do more than pick holes in HMRC's figures. He must show positively what corrections should be made to make the figures right or nearly right.

The FTT held that it is (just) more likely than not a value of £10,000 should be attributed to the personal items (para. 46 of the decision).

Reasonable excuse

The appellant provided no evidence as to why he had failed to register from 1 October (or at all). Thus, the FTT held that the appellant has no reasonable excuse for failing to register (para. 47 of the decision).

Thus, the FTT directed HMRC to recalculate the date on which the appellant was liable to register for VAT, his VAT liability and his liability to a penalty on the basis that his turnover was £417,000 for the period 4 January 2008 to 29 February 2012 and not £427,000.


A person, who makes taxable supplies above a registration threshold, must notify HMRC of the liability to register for VAT within 30 days of the end of the month in which he breached the threshold. Failure to notify such liability renders him liable to a penalty of up to 15% of the VAT for which he is liable to pay for the period during which he should have been registered (the “relevant VAT”). If HMRC wish to recover the relevant VAT, they must assess him to the best of their judgment. Also, they may assess a penalty. He may escape a penalty, if he establishes a reasonable excuse for failing to register. An assessment for failing to notify liability to register must be made within 20 years of the end of the relevant accounting period. However, it cannot be made more than one year after HMRC have evidence of the facts which in their opinion justifies the making of the assessment. Here the taxpayer successfully cut the VAT assessment and the penalty assessment by showing that some of the receipts related to certain privately held goods.

For commentary on best judgment, see In-Depth at ¶58-400.

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