[2009] UKFTT 314 (TC)

								TC00258

Appeal number: LON/2008/1506

Value Added Tax  -  Assessment of VAT on the Appellant for periods after he had claimed to have retired and sold his business, based on the two facts that he had continued for the periods in contention to pay the Income Tax on the profits of the business, and that the Income Tax returns demonstrated that the gross turnover of the business was (marginally) in excess of the VAT compulsory registration thresholds for the periods in question   -   Genuine uncertainty about the facts  -  Appeal dismissed but accompanied by a firm plea that HMRC should show very considerable restraint in enforcing payment of the tax, and the penalty in question

FIRST-TIER TRIBUNAL
TAX CHAMBER

	PETER ROBERT BALKWILL	Appellant

	- and -

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

				TRIBUNAL: 	HOWARD M NOWLAN
						DR MICHAEL JAMES

Sitting in public in Exeter on 3 July 2009

The Appellant in person

Jonathan Holl of the Solicitor’s Office of HMRC for the Respondents

© CROWN COPYRIGHT 2009

DECISION

Introduction

1.     This was a very unsatisfactory case because we have had to give our decision without having any clear understanding of what actually occurred.   It related to the claim that although the Appellant had sought and achieved de-registration for VAT purposes in 2001 when he had allegedly retired and sold his business, HMRC's evidence suggested that he had remained in business, and should have been registered for VAT purposes until 2004.

2.     The Appellant had certainly traded as a plumber and central heating engineer up until 2001.   He claimed that in 2001 he had then retired and sold his business to a Mr. Smith. It was clear that on 20 December 2000 Mr. Smith had written to the Appellant, thanking the Appellant for his 'phone call and "confirming our agreement for the transfer of your business to myself".  Although the only other sentence of the letter confirmed that Mr. Smith had "today asked my solicitor to deal with the transfer", and confirmed that "you will hear from him in due course", it seemed that there was no contact from the solicitor, and no written agreement had ever been drafted or signed.   
  
3.     It was not then clear what happened. There was quite possibly some arrangement with Mr. Smith, though we do not know what it was.  By the date of the hearing, the Appellant was over 80 years of age, and was manifestly in both distress and in poor health.  We found it entirely credible that in the contentious years between 2001 and 2004, it was unlikely that the Appellant would have been working personally in the business.  Whether he was nevertheless the owner of the business is a different matter, though his evidence was that he was not.

4.    The basis on which HMRC made assessments of VAT on the Appellant for all periods from 1 October 2001 to 14 December 2004 was that the accounts of the business, filed for income tax purposes, disclosed that the gross turnover of the business had exceeded (albeit fairly marginally) the compulsory registration threshold for VAT purposes for all periods, and that as the Appellant had returned the profits of the business on his personal tax return, and had paid the resultant income tax on those profits out of either his personal or his business bank accounts,  the Appellant must, effectively on his own admission, have been the trader for VAT purposes.    Accordingly although he had requested de-registration on 10 December 2000, he remained registerable during the period in contention, and was thus both liable for VAT on the disclosed turnover, and liable for a penalty for having failed to make returns.

5.     Whilst we will record below the facts described by the Appellant, on the basis of which he claimed to have had no interest in the business since the year 2000, the Appellant failed, notwithstanding a number of invitations for him to do so, to offer any explanation as to why he had seemingly paid the income tax on the profits of the business, and why that did not indicate that he was the person who was liable to account for VAT in respect of the turnover, once (as it was) that turnover exceeded the compulsory registration threshold.   In view of this we have had no alternative but to conclude that the Appellant was liable for the VAT, and that his appeal should thus be dismissed.    That is our decision. 
 
6.      We do however add two qualifications that we consider most important.  Firstly there does appear to have been some arrangement between the Appellant and Mr. Smith during the period in contention, and we suspect that whatever the arrangement was it will have been vague and entirely capable of being misunderstood.  Secondly we must record that at the date of the hearing, the Appellant had not only recently been in hospital, but he appeared to be both unwell and in considerable distress.  He also asserted, with considerable force, that he and his wife were living simply off his modest state pension and that there was no way in which he could possibly meet a VAT and penalty liability of £19,372 and £2,905.  We thus express the strongest hope that whilst we have felt compelled to dismiss his appeal (because we can discern no possible ground on which we can allow it) it would appear to us nevertheless to be pointless, and very distressing, for HMRC to seek to enforce the debt that the dismissal of his appeal confirms.  We are indeed distinctly troubled that the feature that we feel compelled to dismiss the appeal will cause the Appellant further concern and worry, and very much hope that (albeit possibly after enquiring into his means) HMRC will confirm that they will not proceed to seek to enforce this decision. 

The facts in more detail

7.     Whilst we will record the evidence that was given to us by the Appellant, it will already be evident that this evidence will not materially clarify the issue of who actually conducted the business during the period from 2001 to 2004.

8.    Prior to December 2000 the Appellant had clearly conducted business as a plumber and heating engineer under the business name "Staywarm Heating and Plumbing Engineers".    There was in fact some doubt as to whether he conducted it in partnership with his wife or as a sole trader, but that is not now material.    No dispute arises as to anything occurring before 2001.

9.     According to the Appellant, when he sold his business to Mr. Smith, at some time presumably shortly after the 20 December 2000 letter referred to above, an arrangement was devised by the Appellant's accountant, under which the Appellant retained some small residual interest in the business that was basically sold to Mr. Smith.  Whatever that interest was asserted to be, the retained interest in some way made it appropriate for the Appellant to vet the accounts of the business in several subsequent periods, and according to the Appellant, it was his accountant who suggested that he, the Appellant, should actually sign the accounts.  It was suggested that the retained interest amounted to little more than the possibility of receiving £1000 in addition to whatever the Appellant had received, in both cash and assumption of the business liabilities, and it seemed possible to us that the last £1000 of consideration had been left outstanding, payable perhaps if the profits or assets of the business exceeded some figure.  This supposition was however largely speculation in trying to make sense of the claim about the small remaining interest in the business. 

10.     In response to a letter from HMRC to the Appellant's accountants, in which HMRC tried to reconcile the claims in correspondence about the sale of the business with the fact that HMRC knew that the Appellant himself had paid the income tax on the profits of the business in the period 2001 to 2004, the accountants, Bush & Co of Exeter replied as follows:-

"Thank you for your letter dated 30 March 2009.   
According to our records, Mr. Balkwill ceased to trade in December 2004.   We are aware that he tried to sell his business on a number of occasions, but our understanding is that this was not successful until 2004.
When preparing the accounts for the years referred to in your letter, we did this on the basis that Mr. Balkwill was a sole trader, having formerly been in partnership with his wife.    At no time did he indicate to us that there was a disposal in 2001.   Accordingly accounts were prepared on the basis that Mr. Balkwill was the proprietor.   The accounts were signed by Mr. Balkwill in the normal way for all years concerned and the sold trader accounts formed the basis of the Self Assessment Tax Returns which Mr. Balkwill also signed. 
If it turns out that Mr. Balkwill had, indeed, sold his business in 2001, then we were not aware of any such arrangements [when] the accounts were produced.
If we can be of further help, then please let us know."

11.     Whilst this letter appears to undermine the evidence given by the Appellant, and to have been written by reputable accountants who would have had no apparent motivation to challenge the suggestion that they had been involved in a plan devised to render the 2001 asserted sale workable, we do not conclude that the Appellant's evidence about the sale was wholly untrue. The Appellant made a number of references to the fact that it was Mr. Smith who provided him with the figures for the accounts in the year in question, and it did sound to us as if there was some arrangement between the Appellant and Mr. Smith during this period.  As regards the figures, the Appellant even claimed that the figures provided by Mr. Smith had been wrong, but again we were unclear in what way they were said to have been wrong, and we did not know with certainty whether the figures inserted into the accounts, and on to the Appellant's tax returns for income tax purposes, were the ones that the Appellant thought were right or wrong.  We believe the latter.  As we have said, we do think that it is likely that there was some vague arrangement between the Appellant and Mr. Smith, though whether some or all of the business was sub-contracted on some basis to Mr. Smith, we have no idea, and it very much sounded as if no accountant or solicitor had been involved in clarifying the form of what at best may have been a vague and very likely muddled arrangement. 

12.    We should record that HMRC themselves had sent various taxation forms to Mr. Smith at Staywarm Heating, though whether this was based on information obtained from Mr. Smith or some third party, as distinct from the original 10 December 2000 letter from a colleague of the Appellant, we do not know.  We can accordingly attach little significance to the forms sent by HMRC.
13.     The Appellant did not call for any evidence from Bush & Co.  He claimed that he had fallen out with them, and considered that they had served him rather badly, and having already paid for the preparation of the accounts, he was not prepared to have any further involvement with them, and not prepared to seek evidence from them.    We were also told that Mr. Smith appeared to have left the country. 

Our Decision

14.     We would like to record that HMRC's representative at the hearing acted, in our view, in a very proper manner.  He could clearly see, as we did, that the Appellant was over 80 years of age, in distress, very confused, and also unwell. The representative understandably felt unable to withdraw the case when HMRC were still faced with the two facts that the Appellant had apparently paid all the income tax on the profits of the business for the period from 2001 to 2004, and that the declared turnover in those periods exceeded the compulsory registration thresholds in the various periods for VAT purposes.   The representative nevertheless felt with us, that the Appellant should be given every opportunity to explain either that he had not personally paid the relevant income tax; or perhaps that Mr. Smith had in some way funded him to pay it and that Mr. Smith had borne the relevant tax (though obviously not combined with any other income that he may have had), or indeed to offer any explanation as to why these apparently clear facts about the payment of income tax (coupled indeed with the content of the letter from the accountants) did not completely undermine his summary of the events. 

15.     Notwithstanding this opportunity offered to the Appellant after the hearing, and further requests in writing from HMRC, and in Directions from ourselves, we have been given no explanation as to why his VAT contentions are not undermined by HMRC's evidence that the income tax on the profits was all paid either out of the Appellant's personal bank account or his business account.    

16.     In response to the second clear letter of questions sent to the Appellant after the hearing by HMRC, the Appellant has claimed that he had paid the income tax out of money received in cash from Mr. Smith, ostensibly paid as further consideration for the sale of the business.  We have not seen bank accounts for the relevant period, so that we have been unable to verify the implicit assertion that cash will have been credited to the bank accounts in amounts that would have funded the tax liabilities that the Appellant had duly paid. Whilst the Appellant’s reply to HMRC did not indicate how much money had been received in cash, we do find it to be somewhat of a concern that at the original hearing, the Appellant had suggested that only the most modest amounts of further consideration were left outstanding, and the claim now made by the Appellant does come as a surprise, and a slightly troubling one. We nevertheless conclude that even if everything that the Appellant has now asserted is true, it still utterly fails to explain why the Appellant was signing the accounts, and the tax returns, and paying the income tax owed on those returns, if he was not the trader.  

17.     We accordingly feel that we have no option but to dismiss the appeal.  We have considered whether we would be likely to obtain greater clarification by re-convening the hearing and have concluded that we would not, so that we must now dismiss the appeal. 

Pleas in mitigation

18.     As we said, however, in the opening paragraphs of this decision, we do hope that HMRC will consider three matters before proceeding to collect the tax and the penalty in dispute.

19.   First, this is not a case where we have fundamentally dis-believed all the Appellant's evidence.  We frankly do not know what happened in this case, but we believe that there was probably some vague arrangement between the Appellant and Mr. Smith, and that the current confused state of affairs probably results from misunderstandings, rather than simply from a false claim by the Appellant who appreciates that he was trading at all times until 2004.  
    
20.   The Appellant indicated to us that he had sold his former house in order to reduce or pay-off borrowings and was now living in a much smaller house, and living off his state pension.   We imagine that HMRC will inquire into his means to pay the sum currently assessed, and the penalty, but it sounded to us as if he would not be able to pay it. 

21.     We also confirm that the Appellant had not only been in hospital shortly before the hearing before us, but he appeared unwell, to be having great difficulty with his sight, and to be in considerable distress as a result of the tax claim that he has faced for a considerable period. 

22.     Accordingly, whilst we accept that HMRC's representative could not abandon this case at the hearing, and for similar reasons we could do nothing other than dismiss the appeal we very much hope that HMRC will not proceed to try to collect any of the tax in dispute. We entirely accept that HMRC will properly wish to confirm the points that we have indicated in paragraphs 19 to 21 above, but if our expectations on those points are confirmed then we repeat the hope that HMRC will drop any further proceedings in this case.  We particularly request that those responsible for collecting tax debts that are due should consult with HMRC’s officer who conducted the case on behalf of HMRC at the hearing, in order to obtain whatever confirmation that officer feels it appropriate to give of the various pleas in mitigation that we have mentioned. 

HOWARD M NOWLAN
TRIBUNAL JUDGE
RELEASE DATE: 19 November 2009