[2013] UKFTT 160 (TC)
TC02576
Appeal number:
TC/2012/05396
VALUE
ADDED TAX – late registration for VAT – whether HMRC’s refusal to grant
retrospective exception from registration under paragraph 1(3), Schedule 1,
VATA 1994 unreasonable – held no – whether an appeal against a belated
notification penalty should be upheld – mitigation to nil ordered by reason of
the perceived disproportionate nature of the consequences of his failure to
make timely notification of his liability to register – appeal against the
refusal to grant retrospective exception from registration dismissed – appeal
against the penalty allowed
FIRST-TIER TRIBUNAL
TAX CHAMBER
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MICHAEL ROBERT
HAYNES
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Appellant
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- and -
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THE
COMMISSIONERS FOR HER MAJESTY’S
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Respondents
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REVENUE &
CUSTOMS
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TRIBUNAL:
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JUDGE JOHN WALTERS QC
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DUNCAN McBRIDE
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Sitting in public at Bedford Square , London on 22 February 2013
The Appellant in person
Ms H J James, Officer, HM
Revenue and Customs, for the Respondents
© CROWN COPYRIGHT
2013
DECISION
1. The
appellant, Mr Michael Robert Haynes (“Mr Haynes”) is a flat roofer. He
constructs and repairs flat roofs. Before 2008 he traded through a limited
company and the company’s receipts were below the level requiring registration
for VAT. From 1 January 2008 he began to trade as a sole trader under his own
name.
2. He
appealed, by a notice of appeal dated 30 April 2012, against a refusal of his
application for exception from VAT registration and a belated notification
penalty of £1,698 assessed on 26 January 2012.
3. We heard
oral evidence from Mr Haynes and from Officer Mrs Sharon Hancox of the Appeals
and Reviews Unit of HMRC, who had made the decision on review to confirm the
decision that Mr Haynes was not entitled to exception from registration and
that the penalty issued was correct. We also had a bundle of documents before
us, and two authorities relied upon by Ms Jones for HMRC, Gray (trading as
William Gray & Son) v Customs and Excise Commissioners [2000] STC 880,
a decision of Ferris J, and Mark Mills-Henning v Commissioners for HMRC [2012] UKFTT 44 (TC), a decision of this Tribunal (Tribunal Judge Heller).
4. We find
facts as follows.
5. Details of
the amount of the receipts from Mr Haynes’s business, and when they arose,
month by month, were sent to the Respondents (“HMRC”) in February 2012 by DHS
Consulting of Brighton, who were then acting for Mr Haynes. There was no
dispute about the figures before us – they were accepted by both parties.
6. The value
of Mr Haynes’s taxable supplies in the period of 12 months then ending first
exceeded the threshold figure for VAT registration then applicable (which was
£67,000) in October 2008. This gave rise to a prima facie obligation on
HMRC register Mr Haynes for VAT with effect from 1 December 2008 – see:
paragraphs 1(b) and 5(2), Schedule 1, VAT Act 1994 (“VATA”).
7. However in
2008, Mr Haynes’s wife, who up to that point had kept the books of his business
for him, took a full-time job and could not any longer fulfil this function.
Mr Haynes’s book-keeping thereafter was not diligent.
8. At some
point Mr Haynes instructed accountants. They advised him in 2011 that his
supplies had exceeded the threshold figure for VAT registration and that he
ought to register. A VAT 1 form (Application for VAT Registration) was signed
by Mr Haynes and dated 22 November 2011, declaring that he was registering
because his taxable turnover had gone over the registration threshold in
October 2008.
9. HMRC
registered Mr Haynes originally with effect from what they stated was an incorrect
date. By a letter dated 8 December 2011, they apologised to him for this and
amended the effective date of registration to 1 December 2008. The first
prescribed accounting period was stated to be from 1 December 2008 to 28
February 2012 and he was informed that his first VAT return would show those
dates.
10. HMRC wrote a further letter
to Mr Haynes, dated 13 December 2011, informing him that his failure to notify
his liability to VAT at the proper time had rendered him liable to a penalty
for late notification under section 67(1) VATA and requesting to be told Mr
Haynes’s net tax liability according to the flat rate scheme to enable the
penalty to be assessed, and warning him that absent such information HMRC would
assess for a penalty based on the turnover quoted in the form VAT 1, pursuant
to their powers under section 76(1) VATA.
11. On 14 December 2011, Mr
Haynes’s accountants wrote again to HMRC enclosing a VAT 7 Form (signed by him
on 12 December 2011), in which an application was made to cancel Mr Haynes’s
VAT registration. This application was based on Mr Haynes’s expectation that
his taxable turnover in the next 12 months would be below the deregistration
limit, in fact £60,000. They included the following further information in the
form VAT 7:
‘Turnover
has been below the deregistration threshold since August 2009. It only
exceeded the registration limit in June 2010 and then fell below the
deregistration limit in January 2011. Due to the current economic climate,
business has been badly affected and business turnover has remained below the
limits.’
12. A Schedule produced by Ms
Jones, which was not disputed by Mr Haynes, showed that Mr Haynes’s receipts
were such that he ceased to be liable to be registered for VAT in August
2009. However Mr Haynes’s receipts improved and he became liable to be
registered again during June 2010. The following month, July 2010, was a poor
month for Mr Haynes and during that month he ceased to be liable to be
registered, but again his receipts picked up in August 2010 and he again became
liable to be registered in that month. He ceased to be liable to
be registered again in January 2011 and, according to the evidence before us he
has not again become liable to be registered for VAT. (Liability to
be registered for VAT depends on the value of a person’s taxable supplies
(paragraph1, Schedule 1, VATA). Entitlement to be registered for VAT
depends on a person making or intending to make taxable supplies of whatever
value (paragraph 9, Schedule 1, VATA). A person is registrable, if he
is liable or entitled to be registered (paragraph 18,
Schedule 1, VATA).)
13. In response to the Form VAT
7, HMRC deregistered Mr Haynes with effect from 19 December 2011, which was the
date on which the Form VAT 7 was received by them. HMRC’s power to deregister a
registered person who has satisfied them that he is not liable to be
registered (but remains entitled to be registered, which is this case,
as Mr Haynes continued to make taxable supplies) is a power to deregister at
the registered person’s request with effect from the day on which the request
is made or from such later date as may be agreed (see: paragraph 13(1),
Schedule 1, VATA). Thus, there is no power to backdate a deregistration where
the person ceased to be liable to be registered but continues to be entitled
to be registered. It is otherwise in the case of a person has ceased to be
both liable and entitled to be registered. In such a case, the
person has ceased to be registrable, and the deregistration can be back dated to
the date on which he ceased to be registrable (see: paragraph 13(2), Schedule
1, VATA).
14. On 26 January 2012, no
further information having been sent to HMRC by Mr Haynes in response to HMRC’s
letter dated 13 December 2011 regarding the penalty assessment, HMRC issued a
notice of assessment of civil penalty under section 76 VATA in the sum of
£1,698.
15. In February 2012, new
accountants acting for Mr Haynes (DHS Consulting) wrote to HMRC asking for an
assurance that there would be no VAT liability for the period from 1 December
2008 to 28 February 2012, because Mr Haynes’s turnover had only been above the
threshold in one month, March 2009. This was an incorrect assertion, because
the accountant in making his calculation had not computed the required rolling 12-month
totals (such totals are required by the formulation in paragraph 1(1)(a) of
Schedule 1, VATA, which provides that there is a liability to be registered ‘at
the end of any month, if ... the value of his taxable supplies in the period of
one year then ending has exceeded [the threshold]’).
16. Nevertheless, the point had
been made that Mr Haynes’s turnover had only been above the threshold from time
to time during the period from 1 December 2008 to 28 February 2012 – or during
the period from 1 December 2008 to the date of deregistration, 19 December
2011.
17. On 3 February 2012, DHS
Consulting appealed (though not to the Tribunal) against the penalty notice,
which had been issued to Mr Haynes. In a separate letter dated 3 February
2012, DHS Consulting indicated that they wished to lodge a further appeal on
the basis that Mr Haynes’s takings had only been above the threshold for (a
small) part of the period between December 2008 and December 2011, which should
be ignored because Mr Haynes was not at the time aware that he was liable for
VAT and the VAT would be irrecoverable from his customers. Under cover of that
letter they submitted a VAT return for Mr Haynes, on his instructions, covering
the period December 2008 to December 2011, but they said in the letter that
they felt it should be reversed (sic).
18. It appears that Mr Haynes
may himself have written to HMRC on 6 February 2012 asking HMRC to exercise
their powers not to register him from the date at which he first became liable
to be registered.
19. This is because HMRC
(Officer Ric Nichols) wrote to Mr Haynes on 22 February 2012 referring to such
a letter. Officer Nichols made the point that HMRC could only consider the
question of liability for registration in the light of the facts available at
the time that liability first arose, that is, with reference to the facts as at
October 2008. Officer Nichols added that on the basis of those facts HMRC
could not have been satisfied that the value of Mr. Haynes’s taxable supplies
in the period of one year then beginning would not exceed £65,000. He required
the tax due for the period of registration – i.e. VAT on all supplies made by
Mr Haynes between 1 December 2008 and 19 December 2011 – to be declared on a
VAT return.
20. From HMRC’s Statement of
Case it appears that Mr Haynes made his first and final VAT return on or around
5 March 2012. Calculated using the flat rate scheme, this declared a net
amount of tax due to HMRC of £13,692. The return was not in the Tribunal’s
bundle. Mr Haynes has not paid this tax.
21. DHS Consulting’s
correspondence was treated by HMRC as requests for an internal review of the
refusal of an application for exception from registration and of the decision
to issue him with a belated notification penalty in the amount of £1,698.
22. Officer Mrs Hancox (who gave
oral evidence at the hearing) carried out the review and wrote to Mr Haynes on
24 April 2012 with her decision, which was to uphold Officer Nichols’s decision
that Mr Haynes was not entitled to exception from registration and to confirm
the correctness of the penalty.
23. Exception from registration
for VAT is provided for by paragraph 1(3) of Schedule 1, VATA. That
sub-paragraph provided at the relevant time as follows:
‘A
person does not become liable to be registered by virtue of subparagraph 1(a)
or 2(a) above if the Commissioners are satisfied that the value of his taxable
supplies in the period of one year beginning at the time at which, apart from
this subparagraph, he would become liable to be registered will not exceed
£65,000.’
24. Officer Mrs Hancox made the
point that in deciding whether the test for exception from registration in
paragraph 1(3) of Schedule 1, VATA has been satisfied, the Commissioners can
only consider information that would have been available at the time that
liability to register first arose (i.e. October 2008).
25. Officer Mrs Hancox refused
exception from registration for the following reasons, as set out in her letter
of 24 April 2012:
‘Although
your accountant claims that the turnover of £8,910 in March 2009 was an anomaly,
I would point out that turnover in March, July, August and September 2008 was
£8,159, £7,366, £9,426 and £9,046 respectively. It would appear therefore that
there are fluctuations in your normal trading pattern and the breach of the
threshold was not due to exceptional circumstances.
Although
your running turnover did fall below the deregistration threshold in August
2009, it exceeded the registration threshold again in June 2010.’
26. Officer Mrs Hancox confirmed
the correctness of the penalty, as being in accordance with section 67 VATA,
namely a penalty based on 15% of the VAT for which a person is liable for the
period of default – i.e. the period between October 2008 and November 2011.
Because the period of default was more than 18 months, the penalty rate of 15%
fell to be applied, with mitigation of 25% being allowed to acknowledge that Mr
Haynes had registered for VAT of his own volition. The calculation of the
penalty was 15% of £15,099.44 (the ‘net tax for the period (based on
turnover)’), giving £2,264.91, less 25% thereof, giving £1,698.
27. The notice of appeal
initiating the appeal to the Tribunal was dated 30 April 2012. Mr Haynes’s
personal difficulties in paying the tax and penalty were outlined in the notice
of appeal. It stated that he has no assets other than his house which is fully
mortgaged and jointly owned with his wife, a van used for work, while his wife
has a car which is subject to hire purchase. The point was also made that Mr
Haynes’s receipts only exceeded the registration threshold from time to time,
and questioned HMRC’s reliance on the amounts of receipts before December 2008
in relation to the expectation of the amounts of his receipts in the period
from December 2008 to December 2011. It is submitted in the notice of appeal
that if Mr Haynes had been able to make quarterly returns, this ‘would have
greatly reduced the impact of VAT as numerous periods were below the
threshold’. Finally, the point is made that Mr Haynes has no chance of
recovering VAT in respect of work completed and that had he started charging
VAT his prices would no longer have been competitive, and he would not have
been able to make a living. It is submitted that ‘revised assessments should
be raised for the quarters in which Mr Haynes’s turnover exceeded the VAT
threshold’.
28. As to the penalty, it is
submitted in the notice of appeal that the penalty should be totally rescinded
because the late registration was made voluntarily.
29. The details of the amount of
the receipts from Mr Haynes’s business, and when they arose, month by month,
sent to HMRC by DHS Consulting show relevantly:
30. In October 2008, the
‘rolling total’ of Mr Haynes’s receipts for the 12 months ended at the end of
that month (“the Rolling Total”) was £68,783.90. Mr Haynes’s business had started
at the beginning of January 2008, so this figure represented 10 months’
receipts. It was the first month in which the ‘rolling total’ had exceeded the
registration threshold of £67,000.
31. In November 2008, the
Rolling Total was £73,825.57; in December 2008 (the end of the first 12 months
of trading) it was £76,642.24. In 2009, the Rolling Total steadily declined to
£52,865.01 in October 2009. The one month in 2009 in which, exceptionally,
the Rolling Total did not decline was March 2009, when, by reason of a good
month of supplies (£8,910), the Rolling Total rose from £74,209.03 (February
2009) to £74,960.03, before falling back again to £72,258.36 in April 2009 –
April 2009 was a very poor month of supplies (£2,760).
32. The Rolling Total fell again
in November 2009, to £50,533.34, but then it started to rise, rising steadily
until June 2010, when it reached £73,810. This was above the registration
threshold at that time (£70,000), but Mr Haynes’s Rolling Total had not been
above the registration threshold before that month since June 2009, when it was
£68,995.02, as against the registration threshold at that time of £68,000.
33. The Rolling Total fell again
below the registration threshold in July 2010, following a poor month of
supplies – it was £69,820 – but it rose again in the following months and in
the period from August 2010 to December 2010 inclusive it was above the
registration threshold of £70,000 – peaking at £79,950 in November 2010.
34. After December 2010 the
Rolling Total has been consistently below the registration threshold, declining
from £63,780 in January 2011 to £37,282 in January 2012 (the latest month for
which we have figures).
35. These figures were before
Officer Nichols and Officer Mrs Hancox when they made their decisions.
36. The amount of Mr Haynes’s
supplies varies (obviously) according to the amount of work he is able to do as
a flat roofer. There are two variables. One is the weather – he gets work in
particular after rainy periods. The other is when cheques come in from
customers. His evidence was that months showing particularly high receipts
were probably months when an above-average number of customers had paid their
bills. He said it was impossible to forecast the amount of 12 months’ receipts
in advance.
37. Mrs Hancox in making her
decision to confirm the refusal of exception from registration had looked to
see whether any evidence would have been available at October 2008 to show that
it was likely that Mr Haynes’s turnover would fall below £65,000 in the
following 12 months. Mr Haynes had given no explanation as to why this would
have been likely in October 2008. She added that, looking at the figures for
supplies in the months leading up to October 2008 (which in July to September
2008 inclusive were all higher than the supplies in October 2008) she
considered that there was no reason to think that the supplies in October 2008
had been exceptionally high in amount. (If there had been reason to think that
the supplies in October 2008 had been exceptionally high in amount, she acknowledged
that that would have been a reason to conclude that the value of Mr Haynes’s
supplies in the next 12 months would have been below £65,000.)
38. On the matter of the
penalty, Mrs Hancox had considered whether Mr Haynes had had a reasonable
excuse for the late registration, but she could see none. She added that more
mitigation could have been given if Mr Haynes had returned figures in response
to the letter dated 13 December 2011. She also said that the penalty had been
calculated by reference to the figure of £60,000 for the value of taxable
supplies Mr Haynes expected to make in the 12 months commencing 12 December
2011, as declared in his application for deregistration on that date.
39. We observe that this last
point cannot be right, because VAT calculated by reference to a figure of
£60,000 would be much less than the figure of £15,099.44, which was the basis
of the penalty calculation.
40. On the important question of
whether HMRC were correct to disregard the fact known by them that Mr Haynes’s
turnover was less than £65,000 in the 12 months beginning with November 2008
(it was £52,865.01), Ms Jones relied on Gray (trading as William Gray
& Son). From the decision of Ferris J in that case it is clear that
the decision whether or not to give Mr Haynes the benefit of exception from
registration under paragraph 1(3) of Schedule 1, VATA ought, as a matter of law
to have been taken as at the date when the registration would otherwise become
effective, that is, on 1 December 2008. Furthermore the information which HMRC
are obliged to consider in making that decision is the information which would
have been available to them on that date. Although Mr Haynes was
cross-examined by Ms Jones by reference to his trading expectations as in
October 2008, rather than as at 1 December 2008, we do not think this is
material, because there is no evidence to suggest that HMRC’s decision that a
forward look taken in October 2008 would not have shown that Mr Haynes’s
turnover for the ensuing 12 months would have been below £65,000 was
unreasonable, and, further, there is no evidence to suggest that the position
would have been any different if HMRC’s decision had been taken as at 1
December 2008.
41. We therefore hold that
HMRC’s decision not to except Mr Haynes from registration pursuant to paragraph
1(3), Schedule 1, VATA must be upheld.
42. Furthermore, it is clear, in
our judgment, that Mr Haynes’s claim that he should only be liable for VAT on
his supplies during the period(s) when the Rolling Total showed a liability
to be registered for VAT must fail. This claim (also reflected in the grounds
of appeal settled by DHS Consulting) is misconceived. Once a person is
registered for VAT he must charge VAT on all his taxable outputs until he is
deregistered. Therefore Mr Haynes’s liability for VAT must relate to all the
supplies made by him in the business between the effective date of registration
(1 December 2008) and the effective date of deregistration (19 December 2011).
Mr Haynes has not charged any VAT to his customers, and so the liability must
be taken to be that part of his billings which represents the tax chargeable –
i.e. the amounts billed must be taken to be inclusive (not exclusive) of VAT.
Further, in accordance with usual practice, Mr Haynes should be given credit
for any input tax which he could have claimed and any bad debt relief which he
could have claimed.
43. We ought to mention that Mr
Haynes could issue VAT-only invoices to the customers he has supplied when he
ought to have been accounting for VAT. It may be that some of them would pay
such invoices, particularly if they were made aware of Mr Haynes’s predicament.
44. While we regard ourselves as
constrained by the applicable law to reach the above conclusions, we are
extremely troubled by the harshness of the practical effect on Mr Haynes of his
liability to VAT if it were to be enforced in full by HMRC.
45. During the hearing, Ms Jones
and Officer Mrs Hancox made the Tribunal (and Mr Haynes) aware of HMRC’s
practice in cases of historic liability to VAT where a person has not
registered for VAT. This policy is known as ‘Liable/Not Liable’ and, as we
understood Ms Jones and Mrs Hancox, is a humane and sensible policy of seeking
to recover from a person liable for VAT but who has not registered, only the
amount of VAT due for the periods when he was liable for VAT. That is, HMRC do
not in these circumstances seek to recover VAT due for periods when the person
was not liable for VAT, although he ought to have been registered for VAT in
such periods. There is a reference in the Mark Mills-Henning decision
to HMRC’s Liable No Longer Liable department (ibid. at paragraph 25).
46. If that policy were to be
applied in this case, it would lead to HMRC seeking to collect an amount of VAT
from Mr Haynes which we understand him to accept that he ought to pay. It
would be a just result.
47. We understood the reasons
advanced by Ms Jones and Mrs Hancox as to why that policy was not on its terms
applicable in the present case – namely that Mr Haynes had applied for
registration for VAT and had been registered accordingly and had applied for
deregistration and had been deregistered accordingly. Nevertheless, quite
understandably in our view, this had the effect of adding insult to injury as
far as Mr Haynes was concerned. He represented his situation as being
desperate. He simply did not know how he would be able to pay the VAT sought
by HMRC. And at the hearing he found out that had he not done what he was
advised to do and what he honestly understood he was obliged to do, and indeed what
he was obliged to do, namely register for VAT, then HMRC would have been able
to treat him in a much more lenient way than it was suggested that they could
treat him on the actual facts of the case.
48. Although HMRC’s practice in
this area is not a matter within our jurisdiction, we do urge HMRC, when
considering the practical consequences for Mr Haynes of our decision, to
consider whether, on the special facts of this case, the discretion inherent in
their powers of care and management of VAT ought to be exercised to relieve Mr
Haynes of what we regard as a wholly disproportionately harsh consequence of
his failure to register in 2008, or to seek exception from registration at that
time. This is a very hard case indeed, and was recognised to be one by Ms Jones
and Mrs Hancox at the hearing. We hope that HMRC may be able to give very
sympathetic consideration to Mr Haynes’s position.
49. As to the penalty assessed
on Mr Haynes by reason of his late registration for VAT, we were referred to
section 70, VATA pursuant to which the Tribunal may mitigate a penalty imposed
(in this case under section 67, VATA for failure to comply with the requirement
to notify a liability to register).
50. Section 70(1), VATA provides
that HMRC or, on appeal, a tribunal may reduce the penalty to such amount
(including nil) as they think proper. Section 70(3) precludes the taking into
account of the following items (listed in section 70(4)):
‘(a)
the insufficiency of the funds available to any person for paying any VAT due
or for paying the amount of the penalty;
(b)
the fact that there has, in the case in question or in that case taken with any
other cases, been no or no significant loss of VAT; and
(c)
the fact that the person liable to the penalty or a person acting on his behalf
has acted in good faith.’
51. Apart from these
restrictions, Ms Jones agreed that it was open to the Tribunal to reduce the
penalty for any reasons which appeared to the Tribunal to be just.
52. Although we cannot reduce
the penalty because Mr Haynes has acted in good faith (which he has) or because
there is or may be an insufficiency of funds available to him for paying the
VAT which is legally due or for paying the amount of the penalty (which he said
there was), we are able to mitigate the penalty because of what we regard as
the excessive harshness of the conclusion we have been compelled to arrive at,
as a matter of law, on the question of exception from registration and Mr
Haynes’s strict legal liability to VAT on all supplies made by him between
December 2008 and November 2011 without (it may be) any reasonable prospect of
being able to recover any of that VAT from his customers. Ms Jones agreed that
we could mitigate the penalty for this reason and our decision is that it
should be mitigated to nil.
53. For the above reasons we
dismiss Mr Haynes’s appeal against the refusal of exception from registration
and we allow his appeal against the penalty imposed under section 67, VATA. We
emphasise our concerns about the justice of Mr Haynes being held to be liable
for VAT on all supplies made by him between December 2008 and November 2011
which we have set out at paragraphs 43 to 47 above.
54. This document contains full
findings of fact and reasons for the decision. Any party dissatisfied with this
decision has a right to apply for permission to appeal against it pursuant to
Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules
2009. The application must be received by this Tribunal not later than 56
days after this decision is sent to that party. The parties are referred to
“Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)”
which accompanies and forms part of this decision notice.
JOHN WALTERS QC
TRIBUNAL JUDGE
RELEASE DATE: 28 February 2013
