Case: Late VAT registration penalised
 UKFTT 0229 (TC)
Judge Richard Thomas, John Adrain.
Decision released on 8 April 2019.
Value added tax – Registration – Failure to register in time – (1) Whether effective date of registration proposed by HMRC correct – (2) Whether to apply exception in Value Added Tax Act 1994 (VATA 1994), Sch. 1, para. 1(3), i.e. where forward look over next 12 months shows turnover should be below de-registration limit – (3) Whether liable to a penalty for late registration under FA 2008, Sch. 41 – Conduct of taxpayer’s accountant considered – Taxpayer’s appeal allowed in part.
Potts  TC 07076
In January 2016, Mr Potts filed his income tax return for 2014-15. The self-employment pages for his plumbing business disclosed turnover of £93,274 and informed HMRC that he should be VAT registered.
On 15 December 2016, HMRC wrote advising him of a forthcoming visit and asked for the books and records to be available.
On 21 December 2016, Mr Bridge sent HMRC a form 64-8, which authorised them to deal with him as agent for Mr Potts.
On 26 February 2017, Bridge wrote to HMRC following their visit and enclosed a “cash flow schedule” setting out the receipts of the business at monthly intervals during the two years to 5 April 2016. The schedule for the year ended 5 April 2015 showed takings totalling £93,849. The letter asked HMRC to take into account certain mitigating circumstances and to exercise leniency when assessing a penalty.
On 24 March 2017, HMRC wrote to Mr Potts (with a copy to Bridge) stating that:
(1)he had gone over the VAT registration threshold in August 2014, so the effective date for registration (EDR) was 1 October 2014; and
(2)Bridge had said at the meeting that he had wanted to apply for exemption when registering him for VAT in February 2016. However, HMRC said that the circumstances did not permit exemption, which is for those wholly, or mainly, making zero-rated supplies (VATA 1994, Sch. 1, para. 14).
On 11 April 2017, Bridge wrote to HMRC stating that when the books were handed to him to prepare the 2014-15 return and accounts, he had advised Mr Potts of the liability to be registered and completed a form VAT 1, but Mrs Potts, who was the bookkeeper for the business, had mislaid the letter and failed to file the form.On 2 June 2017, HMRC wrote to Mr Potts and stated that:
(1)he should have been registered on 1 July 2014 (as per an attached a schedule of figures for assessment of £9,232 of VAT for the period from 1 July 2014 to 29 February 2016); and
(2)there would be a penalty for failure to notify.
On 15 November 2017, HMRC assessed a £1,664 penalty for failing to register for VAT on time. The reduction for the prompted disclosure was 100% and the penalty was 20% of the tax lost, which was stated to be £8,323.
The appeal that was lodged by Bridge with the FTT stated that the outcome he wanted was:
‘“No payment whatsoever because of:’
(1)Paragraph 3 Sch 1 VATA 1994 [probably intended to be para 1(3) of Sch 1] – spirit of Act
(2)Ignorance – though professional advice taken
(3)No records inspected
(4)No clear advice by HMRC as to full legislation
(7)Beyond excuses [i.e. proportionality].”
On the question of liability to register, HMRC said that appellant’s own figures showed that he became liable to be registered on 31 May 2014, because the value of his taxable supplies in the one year ending on that date exceeded the registration threshold of £81,000. Regarding the exception from liability to register in Sch. 1, para. 1(3), HMRC said that they had acted reasonably in not granting exception, as Mr Potts could not have demonstrated in May 2014 to their satisfaction that his turnover would be below the de-registration limit in the following 12 months. The “one-off job” that Mr Potts contended was material to his becoming liable to be registered may have re-occurred, due to the nature of the business.
What appeals can be heard?
The FTT decided that as regards the VAT assessment, no appeal against it could be validly made as no VAT returns had been made (para. 68 of the decision). As regards the appealable decision that Mr Potts was liable to be registered from 1 July 2014, the FTT noted that the appeal was nearly three months late, and so the FTT’s permission was required before the appeal could be heard. The FTT examined the delay and the reasons for it by reference to three stages:
(1)whether the delay was serious and significant. The delay was nearly three months, which the FTT decided was serious and significant;
(2)the reason for the delay. The FTT decided that a possible reason was Bridge’s unfamiliarity with the post-2008 law on appeals and reviews for VAT; and
(3)the circumstances. The FTT decided that the failure to appeal was not the fault of Mr Potts, but of Bridge, who asked the FTT to take into account his age, nearly 80, and his unfamiliarity with the FTT system.
The FTT gave permission for the appeal to be made late (para. 75 of the decision).
The registration decision
There was no dispute that Mr Potts had crossed the registration threshold in May 2014, so he was liable to be registered.
Exception from registration: 12-month look forward
As regards HMRC’s decision on exception from registration, the FTT held that Mr Potts had not supplied any evidence that would have shown that his future turnover would not have breached the limit, e.g. by limiting his work to smaller projects or taking time off.
Anyone applying for the exception retrospectively is in a difficult position, because they did not know at the relevant time that they would have to show evidence to convince HMRC of a fall in turnover. Mr Bridge did not put Mr Potts forward to give evidence about what he could have said at the time. Thus, the FTT was unable to say that HMRC’s decision is not one that they could reasonably reached (para. 108 of the decision).
HMRC must establish:
(1)whether the disclosure was prompted; and
(2)when they became aware of the failure.
HMRC argued that the disclosure was prompted.
Bridge argued that (1) in a letter to HMRC he had said that he had completed the income tax return and clearly stated on it that the turnover was over the limit and so registration was required, and (2) an HMRC officer had “tacitly” accepted that only a 10% penalty applied.
HMRC failed to produce that return or any attachments, so the FTT accepted that HMRC were told of the failure before they had reason to be aware of it, and so the penalty that applied was at 10% for an unprompted disclosure (para. 118 of the decision).
It was not necessary for the FTT to consider whether there was a reasonable excuse for the failure or whether there were special circumstances.Thus, the taxpayer’s appeal was allowed in part.
Some people will be surprised that HMRC failed to produce certain evidence at the FTT hearing, e.g. the income tax return and any attachments to that return. The taxpayer’s agent stated in the appeal to the FTT that the taxpayer had taken professional (i.e. his) advice, but he had failed to act on it. However, the professional advice was taken months after the failure, so it cannot provide a reasonable excuse for failing to notify HMRC in time. By using out-of-date terms such as “Back Duty”, “District Inspector” and “General Commissioners”, the agent revealed that he had failed for some years to follow the changes made to the law. The FTT commented that the agent could not properly specify what law he was talking about, but he was content to make misleading accusations about the HMRC officer who was dealing with the late registration.