[2010] UKFTT 471 (TC)

TC00733	
Appeal number:  MAN/2008/01454

VAT – assessment covering 9 year period following failure to register – Appellant had submitted SA income tax returns showing turnover above VAT registration threshold – whether assessment time barred under 73(6) VATA because information about turnover already held by HMRC – no – whether assessment time barred by s 77 VATA in whole or in part (3 year time limit) – no, because although no penalty actually imposed for non-registration, circumstances giving rise to a liability for such a penalty existed and therefore 20 year extended time limit in s 77(4) VATA engaged – reliance on accountant to advise on tax did not affect this – appeal on preliminary issue dismissed	

FIRST-TIER TRIBUNAL
TAX

	MOHAMMED REZA RASTEGAR (trading as MO’S RESTAURANT)	Appellant	
-and-

	THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS (VAT)	Respondents	

TRIBUNAL:	KEVIN POOLE  (TRIBUNAL JUDGE)
ROBERT BARRACLOUGH FCA	

Sitting in public in Manchester on 20 September 2010
Tahir Nawaz of T Nawaz & Co Limited for the Appellant
Bernard Haley, Advocate of HMRC for the Respondents

© CROWN COPYRIGHT 2010
DECISION ON PRELIMINARY ISSUE
Introduction and background
1.	This case concerns an assessment for unpaid VAT of £268,084.98 arising as a result of the Appellant’s failure to register for and account for VAT in relation to his restaurant business.
2.	There was no dispute on the facts which were relevant for this hearing.  
3.	The Appellant, acting as a sole trader, had opened a restaurant in December 1998 in Leeds.  
4.	He had instructed an accountant (recommended to him by a friend with a takeaway food business) to advise him on the tax and accounting aspects of his business.  The accountant (who was a sole practitioner and not a chartered accountant) had notified the Inland Revenue (as it then was) of the commencement of the business and had drawn up accounts for each successive year up to 30 November 2005 and dealt with the related income tax returns.  The accountant had also dealt with the PAYE affairs of the business, both payments and returns.  
5.	However, although it was common ground between the parties that the Appellant had passed the VAT registration threshold by the end of April 1999 (and therefore became liable to register for VAT from no later than the end of May 1999), the Appellant did not at any stage register for VAT.  He maintained that his accountant had not given him any advice in relation to VAT.  He said he completely relied on the accountant to advise him what he needed to do in relation to tax and accounts generally, and was simply unaware therefore of the obligation to register.  Insofar as he thought about VAT at all, he thought that by paying VAT on the drink he bought for sale to his customers, he was paying all he needed to.  He had previously run a takeaway business himself, and had not registered for VAT in relation to that business either – though we inferred that his turnover in that business may well have been below the registration threshold. 
6.	The turnover figures disclosed by the Appellant’s income tax returns (in which the business was described as a “restaurant”), and the dates on which the respective figures were disclosed in returns submitted to the Inland Revenue/HMRC were as follows:
Year ended	Turnover	Date of return	
30 November 1999	£128,814	24 December 2001	
30 November 2000	£218,639	4 December 2002	
30 November 2001	£221,049	31 January 2004	
30 November 2002	£218,639	9 February 2005	
30 November 2003	£248,828	14 July 2005	
30 November 2004	£306,189	12 July 2006	
30 November 2005	£249,486	14 January 2008	
7.	On 4 February 2008 it appears that HMRC’s “Direct Tax Risk Team” first queried the Appellant’s VAT status and referred the matter to HMRC’s “Closer Working Team” for checks to be carried out.  When these checks were carried out on 15 February 2008, it appeared to them that the Appellant was not registered for VAT and the case was referred internally to the “Indirect Tax Risk Team”.
8.	Following initial investigations by HMRC, a letter was sent by them to the Appellant on 23 April 2008, informing him that HMRC were unable to trace any VAT registration for the business and asking him to fill out a questionnaire.  A chasing letter was sent on 20 May 2008.
9.	No response having been received, HMRC determined that the Appellant should be compulsorily registered for VAT and assessed for VAT from the time he passed the VAT registration threshold.  They initially determined that the relevant registration date should be 1 December 1999 and issued an assessment to the Appellant dated 10 October 2008 in the sum of £259,712.2.  Following a review, they determined that the relevant registration date should have been 1 June 1999 and accordingly issued a revised decision and assessment on 9 February 2009, in the sum of £268,084.98, withdrawing the original assessment dated 10 October 2008.  They calculated the liability by reference to the turnover disclosed in the Appellant’s income tax returns and their standard flat rate scheme percentage for restaurant businesses.
10.	According to the income tax returns, the business had not done well and by the spring of 2008 the Appellant had decided to dispose of it.  He ceased to trade on 31 May 2008.  The business appears to have been taken over as a going concern by a different trader.
11.	The Appellant in due course appealed against the decision to register him for VAT and the consequent assessment.
12.	There had been some uncertainty as to whether HMRC had charged (or were proposing to charge) penalties in relation to the Appellant’s failure to register and account for VAT.  At the hearing, Mr Haley confirmed that penalties had not been and would not be imposed. 
Issues for determination
13.	The Tribunal was invited to consider two preliminary issues.  The first was the question of whether the assessment in question had been made wholly or partly out of time.  The second related to the effective date from which HMRC compulsorily registered the Appellant for VAT.  This second issue was dropped during the course of the hearing.
14.	The parties agreed that if the Tribunal found in favour of HMRC in whole or in part on the one remaining preliminary issue (the question of whether the assessment had been raised out of time), then there would be some further discussion between them on the calculation of the relevant VAT liabilities; accordingly, they invited us to defer any consideration of the specific liabilities to a possible future hearing, if the parties are unable to agree on the calculations.
15.	We therefore considered as a preliminary issue the Appellant’s contention that the disputed assessment is wholly or partly time-barred.
16.	There were two limbs to this contention.
The first limb of the Appellant’s contention and our view of it
17.	First, the Appellant contended that the Respondents should be time-barred in relation to the whole assessment by s 73(6) Value Added Tax Act 1994 (“VATA”), which bars any assessment from being raised more than “one year after evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to their knowledge”.  
18.	The Appellant contended that HMRC had knowledge (through the information contained in the Appellant’s income tax self-assessment returns) of the fact that the Appellant’s turnover was above the VAT registration limit much earlier than 9 February 2008 (being the date one year before the date of issue of the relevant assessment).  Mr Nawaz pointed out that The Commissioners of Inland Revenue and the Commissioners of Customs & Excise had been formally merged since April 2005, and had shared information and worked closely together for some time before that.  He invited the Tribunal to infer from this that the information provided by the Appellant in his income tax returns should be regarded as held by HMRC, and should be regarded as “sufficient in the opinion of the Commissioners to justify the making of the assessment” at a much earlier date than 9 February 2008.  It followed, he maintained, that the assessment of 9 February 2009 was out of time under s 73(6) VATA.
19.	We do not agree with this contention.  The wording of the predecessor provision to s 73(6) VATA has been considered in the High Court in Cumbrae Properties (1963) Ltd v Customs and Excise Commissioners [1981] STC 799.  In that case, Sir Douglas Frank QC made it clear that the period of one year runs from the date when “evidence of facts, sufficient in the opinion of the Commissioners to justify the making of the assessment, comes to their knowledge” [emphasis added]. He agreed with the Commissioners that the tribunal “cannot substitute its own view of what facts justify the making of an assessment but can only decide when the last of those facts was communicated or came to the knowledge of the officer”.  He went on to say that “the court can only interfere if there is sufficient material to show that the officer's failure to make an earlier assessment was perverse”.
20.	In the present case, HMRC said in their Statement of Case:  
“In the Respondents’ opinion the relevant date was the date it was established that the Appellant was not registered for VAT; this date is 15 February 2008 and a copy of the letter referenced with this date is attached”.
21.	The letter in question was an internal letter from one Nasreen Khan in HMRC’s “Closer Working Team” in Leeds to another HMRC officer at Albert Bridge House, Manchester, referring to an attached “request for information from Inland Revenue” (which request was not included in the evidence).  In that letter, Officer Khan says:
“I was unable to trace any VRN’s for this trader by performing all the basic checks and have referred this for your action.
Please can you action appropriately and return to the Closer Working Team, Leeds.”
22.	At the hearing of the appeal, however, Mr Haley asserted that the relevant date was in fact 5 March 2008 rather than 15 February 2008.  This was based on a letter from Officer Sandy Illingworth of HMRC to Mr Nawaz dated 10 November 2008, which included the following passage:
“We, in the Hidden Economy Team, were informed that Mr Rastegar had submitted SA returns that exceeded the VAT threshold, on the 5th March 2008.”
23.	None of the relevant HMRC officers was available to give evidence as to precisely what facts had, in their view, justified the raising of the assessment, or exactly when HMRC had become aware of those facts.  We are therefore forced to draw our own conclusions based on the material before us, namely the available correspondence and the conflicting statements contained in HMRC’s statement of case and made by Mr Haley at the hearing.
24.	We find that the crucial facts – the facts “sufficient in the opinion of the Commissioners to justify the making of the assessment” were the following two facts combined:
(1)	a self assessment tax return had been filed which suggested that the Appellant’s turnover was above the VAT registration threshold; and 
(2)	HMRC were unable to trace a VAT registration for the Appellant.  
25.	We find that the last of those facts came to the knowledge of HMRC no earlier than 15 February 2008.  On that basis, and since we do not consider HMRC’s “failure to make an earlier assessment was perverse” (as mentioned by Sir Douglas Frank QC in Cumbrae), it follows that in our view the revised assessment issued on 9 February 2009 is not out of time under s 73(6) VATA.
Second limb of the Appellant’s contention and our view of it
26.	Second, the Appellant contended that the Respondents should be time-barred in relation to that part of the assessment that related to periods ended more than three years before the assessment was issued (i.e. periods ended earlier than 9 February 2006) by reason of s 77(1) VATA, which, at the time the assessment in question was issued provided (so far as relevant):
“(1)  Subject to the following provisions of this section, an assessment under section 73.... shall not be made –
(a)	more than 3 years after the end of the prescribed accounting period.... concerned”
27.	In response to this argument, HMRC pointed out that at the relevant time, s 77(4) VATA provided (so far as relevant):
“(7)  .... if VAT has been lost –
(a)	....
(b)	in circumstances giving rise to a liability to a penalty under section 67,
an assessment may be made as if, in subsection (1) above, each reference to 3 years were a reference to 20 years.”
28.	In HMRC’s contention, they could rely on this subsection as the circumstances of this case were such as to give rise to a liability to a penalty, even though they had elected not to charge one.  Section 67 (so far as relevant) provided as follows:
(1)  In any case where – 
(a)	a person fails to comply with any of paragraphs 5...... of Schedule 1....
he shall be liable, subject to subsections (8) and (9) below, to a penalty...
...
(8)  Conduct falling within subsection (1) above shall not give rise to liability to a penalty under this section if the person concerned satisfies the Commissioners or, on appeal, a tribunal that there is a reasonable excuse for his conduct.”
29.	HMRC contended that:
(1)	the Appellant’s admitted failure to notify them of his liability to be registered under paragraph 5 of Schedule 1 VATA gave rise, at first sight, to a liability to a penalty on the Appellant’s part under s 67 VATA; 
(2)	the only argument raised by the Appellant to resist such liability was an argument under s 67(8) that he had a reasonable excuse as a result of being let down by his professional adviser (whom he relied on to advise him as to his tax liabilities, including his obligation to register for VAT); and 
(3)	that argument was bound to fail by reason of s 71(1) VATA, which provided that:
“(1)  For the purpose of any provision of sections 59 to 71 which refers to a reasonable excuse for any conduct –
(a)	...
(b)	where reliance is placed on any other person to perform any task, neither the fact of that reliance nor any dilatoriness or inaccuracy on the part of the person relied upon is a  reasonable excuse”
(4)	to engage the extended 20 year limitation period, all that was necessary was that there should be “circumstances giving rise to liability to a penalty under section 67”, and the application of HMRC’s discretion in refraining to impose that penalty did not (as Mr Nawaz may have been suggesting) prevent them from taking advantage of the extended limitation period.
30.	We accept HMRC’s argument on this point.  The Appellant’s failure to notify HMRC of his liability to register for VAT gave rise to a penalty liability which could not be avoided by contending that a reliance on bad professional advice afforded a “reasonable excuse”.  Therefore the 20 year limitation period applied, irrespective of whether HMRC actually imposed a penalty for non-notification.
Conclusion
31.	It follows that we do not accept either of the Appellant’s arguments that the assessment should be time-barred and we therefore find in favour of HMRC on the preliminary issue we were asked to decide.
32.	We were asked not to issue a final decision on the whole appeal if we reached this view, so as to enable further discussions to take place as to the amount of the assessment which has been raised.  We therefore direct that the appeal should be adjourned and re-listed for hearing on the application of either party if agreement cannot be reached on the amount of the assessment.  At that stage it may well be appropriate for further directions to be given so as to clarify and narrow the issues to be resolved at the final hearing, rather than simply proceeding direct to the hearing itself.
33.	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.

KEVIN POOLE
TRIBUNAL JUDGE
RELEASE DATE: