[2009] UKFTT 50 (TC)

TC00029
					Appeal number LON/2007/1169

Value added tax – late registration – exception from registration –Commissioners not satisfied that value of supplies in following year would not exceed deregistration threshold – whether Commissioners had to be satisfied by reference to evidence as at date taxpayer liable to be registered – yes – para. 1(1) and para. 1(3), Schedule 1 VATA 1994 – appeal dismissed 

FIRST-TIER TRIBUNAL
TAX

	NICHOLAS PAUL DRURY	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (Value Added Tax)	Respondents

			Tribunal:	EDWARD SADLER (Judge)
					MOHAMMED FAROOQ

Sitting in public in Birmingham on 26 March 2009

Mr J Eastwood, accountant, for the Appellant

Mrs G Orimoloye, advocate, of the office of the General Counsel and Solicitor to Her Majesty’s Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2009

DECISION
Introduction
1.	This is an appeal by Mr Nicholas Paul Drury (the “Appellant”) against a decision of The Commissioners for Her Majesty’s Revenue and Customs (the “Commissioners”) refusing the Appellant’s request for exception from registration for VAT purposes and the subsequent registration of the Appellant with effect from 1 September 2006.
2.	In summary, the Appellant became aware that he might be liable to register for VAT purposes some months after he actually became liable – he had misunderstood the way in which the registration turnover threshold test is applied.  He contacted the Commissioners and in the course of correspondence with them told them that his future turnover might not exceed the turnover threshold for registration purposes, so that he might qualify to be excepted from the liability to register.  The Commissioners enquired into the matter and concluded that at the time the Appellant became liable to register he could have produced no evidence that would have been able to satisfy the Commissioners that his future turnover would be reduced below the relevant threshold.  Accordingly they wrote to the Appellant on 6 June 2007 refusing his request for exception from registration and proceeded to register the Appellant with effect from 1 September 2006.
3.	As we mention below, in large part the Appellant’s complaint is not with the decision reached by the Commissioners, but, as he sees it, the fact that he was badly advised to apply for exception from registration, and that the process took several months for the Commissioners to reach their decision.  During that time he was not able to charge VAT to his customers on the supplies he made to them, but when he was subsequently registered with retrospective effect he became liable to account for VAT on such supplies.  He complains that he was not warned of this risk should his application for exception from registration be unsuccessful.
4.	At the hearing of his appeal we explained to the Appellant that our jurisdiction extends in the circumstances of his case to consider only the questions of law as to whether he became liable to register with effect from 1 September 2006 and whether the Commissioners had acted lawfully in deciding that he should not be excepted from liability to register.
5.	For the reasons set out below it is our decision that the Appellant became liable to register for VAT purposes on 1 September 2006, and that the Commissioners acted lawfully in refusing to except him from liability to register.  The Appellant’s registration with effect from 1 September 2006 is therefore valid, and the Appellant’s appeal must be dismissed.
6.	As we also mention below, if the Appellant considers that he has grounds for complaint as to the way in which the Commissioners have dealt with his case, he must pursue his complaint by other means.
7.	We make one other preliminary observation: from the evidence we saw in terms of the correspondence between the parties and the Appellant’s oral evidence at the hearing, we have no doubt that throughout the Appellant behaved honestly and candidly, and with the intention of fulfilling his responsibilities as a taxpayer.  He, of his own volition, approached the Commissioners with a view to finding out if his business had reached the point where VAT registration was necessary, and any mistake on his part as to the calculation of the turnover threshold for registration purposes was entirely innocent.  A somewhat casual reference to the possibility that his turnover might not be sustained led to the enquiry as to whether he should be excepted from registration and, in consequence, to the delay in registration.  However, a mistake, however innocent, does not excuse a taxpayer from the proper application of the law.
The evidence and the findings of fact
8.	We had in evidence before us the correspondence during the period January 2007 to October 2007 between the Appellant and the Commissioners relating to his registration and notes prepared by the Commissioners of the telephone conversations between the parties during that period.  We had oral evidence from the Appellant, and for the Commissioners we had oral evidence from two officers who had been involved in this matter, Mrs Debbie Caldicott, a processing manager in the Wolverhampton VAT registration service and Mrs Sharon Hancox of the Appeals and Reconsideration Office, who had reviewed the decision made by the registration unit not to except the Appellant from registration.  Mrs Caldicott gave the decision in June 2007 against which the Appellant appeals.  Mrs Hancox reviewed the matter again in October 2007.
9.	We find the facts to be as follows:
(1)	The Appellant, as sole proprietor, carries on business as a builder from premises in Banbury, Oxfordshire.  The supplies he makes are, for VAT purposes, taxable supplies.  He prepares his accounts on the basis of a financial year ending 31 March.
(2)	By the end of July 2006 the turnover of his business for the twelve months then ending amounted to £65,739.  At that time, applying the normal rule, a person became liable to register for VAT purposes if his taxable supplies for a twelve month period exceeded £61,000.
(3)	The Appellant’s books of account were then kept by a relative (now deceased) and the Appellant was not aware until January 2007 that he was likely by the end of that financial year to exceed the turnover threshold for registration – both he and his bookkeeper were of the mistaken view that the turnover threshold was computed by reference to the yearly accounting period of the taxpayer, rather than on a “rolling” twelve months basis.
(4)	On 29 January 2007 the Appellant approached the Commissioners through his local VAT office and then telephoned the VAT National Advice Service, whose record of that call is as follows: “Caller’s taxable supplies had exceeded threshold, but caller felt they would not do so again in next 12 months – did he have to register?  Advised caller that as per section 2.2 of PN 700/1 he may apply for exception.  Gave details below [address of Registration Unit in Wolverhampton] and advised to contact Registration Unit.”
(5)	The Appellant acted immediately on that advice and on 30 January 2007 wrote to the Registration Unit in Wolverhampton explaining that he had been advised to ask for exception from registration.  He said that he had not anticipated that his turnover would reach the £61,000 threshold, but now knew that it would, and that was mainly due to the fact that three of his invoices (out of 150) totalled £30,000.  He said that he did not anticipate this repeating itself in the coming financial year, but that he would monitor his progress.  He asked for the information he would need should it become necessary for him to register.
(6)	An officer from the Exceptions Section of the Registration Unit at the Wolverhampton office of the Commissioners replied on 2 February 2007 asking for information as to the business, monthly taxable turnover totals for the two years ending January 2006, the unusual or exceptional contracts to which the Appellant had referred, and the expected taxable turnover for the next 12 months.
(7)	The Appellant replied on 20 March 2007 with the information requested.  He said that he had, in the current year, engaged sub-contractors to undertake work he was not able to do, and this had increased the amount the business had invoiced.  He said that he was unable to forecast whether he would have any exceptional contracts for the next twelve months, and that he was unable to forecast his taxable turnover for the next twelve months as “every new job is different”.
(8)	Further correspondence ensued, in the course of which the Appellant explained that he had reached the decision that his customers should pay directly for the materials used by him in carrying out work for them, and that this would result in his turnover being reduced below the registration threshold.  He said that this decision was reached on 1 April 2007.
(9)	On 8 May 2007 the Registration Unit advised the Appellant that he had, on the information he had supplied, exceeded the registration threshold in July 2006 so that he became liable to register not later than 1 September 2006.  At that time there was no evidence that the Appellant’s turnover for the following twelve months would fall below £59,000 (the deregistration threshold), since any plans to change his method of work (for example by asking customers to purchase material directly) were not then formulated.  The Appellant was advised that he should proceed to register with effect from 1 September 2006, and that he could ask for a review of the decision of the Registration Unit.
(10)	At the Appellant’s request the decision was reviewed.  The review was carried out by Mrs Caldicott.  In her letter to the Appellant of 6 June 2007 she said that the registration turnover threshold had been exceeded in April 2006 so that registration was required with effect from 1 June 2006 (this was subsequently corrected on a further review by Mrs Hancox in October 2007, who confirmed that the threshold had been exceeded in July 2006, so that registration was required as from 1 September 2006).  Mrs Caldicott said that exception from registration is granted if, at the point the threshold is exceeded, the Commissioners have evidence that satisfies them that turnover in the following twelve months is likely to fall below the deregistration threshold, and that since there was no such evidence in the Appellant’s case (the evidence he had provided as to the change in his dealings with his customers related to April 2007) he was not entitled to be excepted from registration.  Mrs Hancox (who, as mentioned reviewed the matter once more in October 2007) confirmed the decision of the Exceptions Unit of the Registration Unit on the same grounds.
(11)	On 13 May 2007 the Appellant applied for registration and in June 2007 he was registered with effect from 1 June 2006 (subsequently amended by the Commissioners to 1 September 2006).
(12)	The Appellant confirmed to the tribunal at the hearing that he accepted, now that he understood how the registration turnover threshold was calculated on a “rolling twelve months” basis, that he had exceeded the threshold in July 2006.  He also confirmed that at July 2006 he would not have been in a position to forecast that his turnover for the following twelve months would have been below the deregistration threshold of £59,000, and that in fact his business had expanded over this period and he had not changed his business methods to move to a situation where customers bought their own materials.
The relevant statutory provisions
10.	The statutory provisions relating to a taxpayer’s liability to register for VAT purposes are found in Schedule 1 to the Value Added Tax Act 1994 (“VATA 1994”).
11.	Paragraph 1(1) of Schedule 1 sets out the basic rule as to when a person becomes liable to be registered, and in so far as is relevant to this appeal provides as follows:
Subject to paragraphs (3) to (7) below, a person who makes taxable supplies but is not registered under this Act becomes liable to be registered under this Schedule – 
(a)	at the end of any month, if the value of his taxable supplies in the period of one year then ending has exceeded £61,000….
12.	The basic rule as to liability to be registered is subject to an exception set out in paragraph 1(3) of Schedule 1, which is in these terms:
A person does not become liable to be registered by virtue of sub-paragraph (1)(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 sub-paragraph, he would become liable to be registered will not exceed £59,000.
The reasoning behind this exception is clear: if a trader has, for any exceptional reason, exceeded the turnover threshold for registration, but is then likely to fall below the deregistration threshold for the following year, he should not be required to go through the process of registration which would only take effect at a time when his trading conditions would entitle him to apply for deregistration.
13.	Finally, it is necessary to look at the provision which sets out the obligation placed on the taxpayer to notify the Commissioners of his liability to register and the time at which the Commissioners must register the taxpayer.  This provision is found in paragraph 5 of Schedule 1, as follows:
(1)	A person who becomes liable to be registered by virtue of paragraph 1(1)(a) above shall notify the Commissioners of the liability within 30 days of the end of the relevant month.
(2)	The Commissioners shall register any such person (whether or not he so notifies them) with effect from the end of the month following the relevant month or from such earlier date as may be agreed between them and him.
(3)	In this paragraph “the relevant month” in relation to a person who becomes liable to be registered by virtue of paragraph 1(1)(a) above, means the month at the end of which he becomes liable to be so registered.
Thus if (in the circumstances of this case) the value of a person’s taxable supplies in the year ended July 2006 exceeds the threshold of £61,000, then July 2006 is “the relevant month”, and within 30 days of the end of July 2006 he must notify the Commissioners of his liability to be registered.  The Commissioners are required to register that person with effect from the end of the month following July 2006, that is, with effect from 1 September 2006, and this is so whether or not the person has, within the 30 day period, actually notified the Commissioners that he has become liable to be registered.
The parties’ submissions
14.	The Appellant appealed to the tribunal against the decision of the Commissioners not to except him from liability to register by his Notice of Appeal dated 29 June 2007.  The grounds he gave then for his appeal were that he anticipated in January 2007 that the value of his supplies would exceed the registration threshold for the year ending 31 March 2007; that his turnover for the year ended 31 March 2006 was £43,012 and was therefore below the threshold; that when he contacted the Commissioners he was advised to apply to them for exception from registration; that it took from January 2007 until May 2007 for the Commissioners to conclude that he was not entitled to be excepted from registration; that retrospective registration to 1 September 2006 meant that he could not recover VAT from customers he had billed in the period from that date until the Commissioners actually registered him (June 2007); and that throughout he had acted honestly and promptly but had been penalised and treated unjustly.
15.	At the hearing Mr Eastwood, representing the Appellant, repeated these points, and added that if the Appellant had been advised by the Commissioners of the consequences of applying for exception (namely, that the process would take some months, and that, if unsuccessful, the Appellant would nevertheless have to pay VAT which he could not recover from his customers) then the Appellant might well have simply opted for immediate registration and thereby minimised the amount of VAT charged to him as a consequence of retrospective registration.
16.	For the Commissioners Mrs Orimoloye submitted that on the facts, as now conceded by the Appellant, the Appellant became liable to register for VAT purposes on 1 September 2006, applying the provisions of paragraph 1(1) of Schedule 1 to VATA 1994.  The Commissioners had therefore acted correctly in registering the Appellant with effect from that date.  
17.	As to the question of whether the Commissioners should have excepted him from registration under the provisions of paragraph 1(3), they had no evidence that, at the time the Appellant became liable to register, his turnover for the year then beginning would not exceed £59,000 – the suggestion from the Appellant that he would ask his customers to purchase materials direct as a means of reducing his turnover was a proposal he put forward in April 2007, and in itself was not evidence that as at 1 September 2006 this would result in reduced turnover.  The Commissioners had to be satisfied on this point as at the time the taxpayer was liable to be registered (1 September 2006 in the present case), as decided in the case of Gray trading as William Gray & Son v Commissioners of Customs & Excise Ch D 2000 STC 880, and not at some later time.  Since the Commissioners had no evidence that, as at 1 September 2006, it was likely that the Appellant’s turnover would be reduced for the year then beginning, they had acted correctly in refusing to except the Appellant from registration.
Decision
18.	There are two issues which it is within our jurisdiction to decide: first, was the Appellant liable to be registered for VAT purposes with effect from 1 September 2006; and secondly, if he was so liable, did the Commissioners act lawfully in deciding that he was not entitled to be excepted from registration on the grounds that, as at 1 September 2006, there was no evidence that the value of his taxable supplies in the year beginning 1 September 2006 would not exceed £59,000.
19.	As to the first issue, it is clear that the Appellant was liable to be registered for VAT purposes with effect from 1 September 2006.  The Appellant supplied his monthly turnover figures to the Commissioners (all of which comprised supplies which are taxable), and from those figures it is clear that by the end of July 2006 the value of his taxable supplies in the period of twelve months then ending had exceeded £61,000.  Applying paragraph 1(1)(a) of Schedule 1 to VATA 1994 the Appellant became liable to be registered at the end of July 2006, which was “the relevant month” for the purposes of paragraph 5 of Schedule 1, and the Commissioners were therefore required to register him with effect from 1 September 2006.
20.	As mentioned, the Appellant’s understanding was that the turnover threshold test for registration purposes was measured by reference to turnover achieved as at the end of his financial year, but the Appellant was mistaken in this – it is clear beyond any doubt that paragraph 1(1)(a) of Schedule 1 looks to a “rolling” twelve months period.
21.	Since the Appellant was liable to be registered with effect from 1 September 2006, we have to decide the second issue.
22.	Paragraph 1(3) of Schedule 1 to VATA 1994 confers a discretion on the Commissioners – if they are satisfied that the value of the taxpayer’s taxable supplies in the twelve months beginning at the time he is otherwise liable to be registered will not exceed the deregistration threshold of £59,000, then the taxpayer does not become liable to be registered.  There is no guidance within the statutory provision itself as to the manner in which the Commissioners are to satisfy themselves on this point, or of the factors they should take into account in order to reach their conclusion.  However, well-established principles of law establish that the exercise of such a discretion can be set aside by the courts only if it is the case that the Commissioners have acted in such a way that no reasonable body of Commissioners could have reached the decision upon which they acted.  This might be the case, for example, if in reaching their decision the Commissioners had disregarded factors relevant to the matter in question, or had taken into account in reaching their decision factors which were not relevant.
23.	In the Appellant’s case we see no basis for a challenge to the decision of the Commissioners that they were not satisfied that in the twelve months beginning 1 September 2006 the turnover of the Appellant’s business would not exceed £59,000.  It is clear from the correspondence that the officer concerned at the Registration Unit was careful and diligent to obtain details from the Appellant of his forecast of turnover for the twelve month period, asking about individual past months where there appeared to be larger than average turnover, asking about the likelihood of exceptional invoices for the future, and following up the Appellant’s suggestion that he might change his practice so as to ask customers to buy their own materials.  From these enquiries it was clear that, at the time the Appellant became liable to be registered, that is, at 1 September 2006, the Appellant was not able to forecast that his turnover for the subsequent twelve months would be reduced.  Indeed, as late as 20 March 2007, in reply to the officer’s question of 2 February 2007, the Appellant said he was unable to forecast his turnover for the next twelve months (at that point in the enquiry, the question as to future turnover was posed in relation to “the next 12 months”, not in relation to the expectation as at 1 September 2006).  The Appellant’s decision to ask his customers to pay for their materials as a means of reducing turnover was made, as the Appellant stated in the correspondence, on 1 April 2007, at the start of the Appellant’s new financial year (although, as the Appellant told us in his evidence at the hearing, that decision was not acted upon).  The Appellant had raised the point that some of his invoices had been increased by the use of sub-contractors, but he did not press this as a ground for suggesting that future turnover would be reduced when he was specifically asked to forecast future turnover.
24.	The Commissioners, in reaching their decision, proceeded on the basis that the relevant point in time at which they had to be satisfied as to reduced turnover was 1 September 2006, that is, the point at which the Appellant became liable to be registered.  That, it seems to us, is correct.  It is implicit in the language of paragraph 1(3) of Schedule 1 that the point at which the Commissioners must be satisfied on the question of reduced future turnover is the point at which the taxpayer is otherwise liable to be registered.  It follows that even if the Commissioners are, as in the present case, enquiring into the question for whatever reason at a later date, they must ask themselves whether, at the time the taxpayer was liable to be registered, they would then have been satisfied on the point by reference to the evidence which then would have been available to them.  
25.	This is confirmed in the case of Gray trading as William Gray & Son v Commissioners of Customs & Excise Ch D 2000 STC 880, where Ferris J said at [23]:
“I conclude, therefore, that in cases of later registration as well as in cases where the trader notifies in due time, the Commissioners must give effect to paragraph 1(3) by considering the case as at the date from which registration would otherwise take effect and, by looking forward ask themselves whether they are or are not satisfied that turnover will not exceed the threshold amount.”
He went on to say that the Commissioners, in considering the case as at the date from which registration would otherwise take effect, must take into account only such matters as they would then have been able to take into account had they made their judgment at that time.
26.	That, it is clear to us, is exactly how the Commissioners proceeded in the present case.  The Appellant was unable to provide any evidence to the Commissioners that, as matters stood at 1 September, he could at that time have reasonably expected that his turnover for the forthcoming twelve months would be reduced below the deregistration threshold.  In his evidence to us the Appellant was candid enough to concede that at 1 September 2006 he could have made no forecast of his future turnover: that is consistent with what he told the Registration Unit when asked in February 2007 if he could forecast his turnover for the following twelve months.  In consequence the Commissioners acted lawfully in deciding that the Appellant should not be excepted from liability to register.
27.	Accordingly, we determine both issues in favour of the Commissioners and dismiss the Appellant’s appeal.
28.	It is apparent both from the Appellant’s Notice of Appeal and from his case as presented to us at the hearing of his appeal that the Appellant’s underlying complaint is with the way in which his case was dealt with by the Commissioners, and in particular that he was encouraged to follow the path of seeking exception from registration without being advised of the pitfalls which lay in that path should his request for exception be refused.  He also complains that those pitfalls were enlarged by the time taken by the Commissioners to consider his case and reach their decision.  He put it in these terms in his Notice of Appeal: “I feel I have done my best to comply with the rules and regulations, answering all your [i.e. the Commissioners’] questions honestly and promptly, but I feel as though I am being victimised retrospectively and unjustly, and this is the reason for my appeal.”
29.	As we have mentioned, those are not issues in respect of which we have jurisdiction to hear the Appellant’s complaint or grant him a remedy.  We can understand his feelings that matters have worked to his disadvantage when he himself was endeavouring to comply with his responsibilities, albeit on the basis of a genuine mistake as to when to calculate the point at which the registration threshold was exceeded.  Mrs Orimoloye assured us at the hearing that if the Appellant made a formal complaint to the Commissioners then that would be reviewed by the Commissioners in accordance with their complaint procedures.  It is also open to the Appellant to take his case to the office of the Tax Adjudicator if the complaint procedures of the Commissioners do not resolve the matter to his satisfaction.
30.	We make no order as to costs.

EDWARD SADLER

TRIBUNAL JUDGE
RELEASE DATE:16 April 2009