[2011] UKFTT 222 (TC)

TC01087	
Appeal number:  TC/2010/07829

VAT – Penalty for failure to notify obligation to register – section 67 VATA 1994 – Appellants applied to be registered for VAT on the basis of TOGC and estimated turnover above threshold – subsequently made nil VAT returns and applied to deregister on basis that business in fact transferred to a separate company so that they had never traded – held that no such transfer took place and VAT registration was required – penalty upheld	

FIRST-TIER TRIBUNAL
TAX

	WAI HO TAKEAWAY (partners An Chen and Lin Chen)	Appellants	

-and-

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

TRIBUNAL:	KEVIN POOLE  (TRIBUNAL JUDGE)
BEVERLEY TANNER	

Sitting in public in Birmingham on 29 March 2011

Simon Poon of Grandway Trading Limited for the Appellant
Helena Perrett, Higher Officer of HMRC for the Respondents

© CROWN COPYRIGHT 2011

DECISION

Introduction
1.	This appeal relates to a penalty of £207 imposed by HMRC for failure to register for VAT.  We take the unusual step of issuing a full decision in such an apparently small case because the Appellant’s representative at the hearing indicated his intention to apply for permission to appeal our decision (which was given orally) and therefore the effort involved in producing a summary decision would have been wasted.
The Facts
2.	The information presented to the Tribunal was quite sketchy and no witnesses attended to give evidence.  We therefore relied almost exclusively on the documentary evidence before us, and where that evidence conflicted we drew what we regarded as the most likely conclusions as to the true underlying facts.
3.	So far as HMRC were concerned, this case started with the receipt by them on 20 May 2010 of a letter dated 19 May 2010 from Liu & Company, a firm of accountants in Sheffield.  That letter submitted an application in form VAT1 for a VAT registration of a partnership called Wai Ho Takeaway.  The partners (whose details were set out on an accompanying form VAT2) were stated to be An Chen and Lin Chen.
4.	The forms were not fully completed.  The form VAT1 was signed (but not dated) by An Chen, whose date of birth and NI number were not given.  It did not include an estimate of the taxable supplies of the business in the next 12 months.  It stated that the partnership had taken over the business as a going concern on 22 November 2009, the previous owner of the business being named as “Chen”.  No previous owner’s VAT number was given but in any event the partnership stated that it did not wish to take over the old business’s VAT number.  On the form VAT2, no NI number was given for An Chen.
5.	After receipt of the forms, on 28 May 2010 an unidentified VAT officer telephoned the business and obtained an estimated turnover figure.  The file note of that call reads: “Rung ptr.  Confirmed t/o as £78k. Confirmed living above shop.  OK to reg.”  The figure of £78,000 was also inserted into the form VAT1 with a note underneath saying “O/A SBR 28/5/10”.  We take the “O/A” as meaning “Officer’s Assessment” (a standard abbreviation in HMRC) and “SBR” (or it may read “SER”) as the initials of the relevant officer.
6.	HMRC then went ahead and registered the Appellants for VAT with effect from 22 November 2009 and then sent a letter dated 1 July 2010 informing them that it would be imposing a penalty for late notification.  That letter asked the Appellants to provide details of their taxable supplies from 22 November 2009 up to 20 May 2010 for the purposes of calculating the penalty, but warned that if the information was not returned, they would “assess you for a penalty based on the turnover you have quoted on your VAT1”.
7.	In the meantime, a VAT return was also sent to the Appellants for the period from 22 November 2009 to 30 June 2010 and that form was signed by Lin Chen and dated 5 July 2010 and received by HMRC shortly after that date.  It showed “None” in all the boxes.
8.	The next thing received by HMRC (on 16 July 2010) was a form 64-8 authorising HMRC to deal with Grandway Trading Limited on behalf of the Appellants.
9.	The next item of correspondence was a letter dated 2 September 2010 from HMRC to the Appellants which notified them that HMRC had imposed a civil penalty of £207 for late notification of liability for VAT.  It was calculated on the basis of 5% of HMRC’s assessment of the net VAT due for the period (£5538.95), less a reduction of 25% to take account of the fact that the notification had been voluntary.  The Appellants have not taken issue with the calculation of the penalty.
10.	The next thing received by HMRC was an application dated 22 September 2010 signed by Lin Chen requesting deregistration.  It gave as the reason for the request: “Application for VAT registration from 22/11/09 is wrong.  We have never traded from 22/11/09”.
11.	On this form, an address for correspondence was given which is the same address as Mr Poon’s company.
12.	The Appellants appealed against the £207 penalty direct to the Tribunal by Notice of Appeal dated 5 October 2010 which was submitted by Grandway Trading on their behalf, and signed by Mr Poon.  This Notice of Appeal was received by the Tribunal on 6 October 2010.  The grounds of appeal were as follows:
“A NIL VAT RETURN WAS COMPLETED FOR THE PERIOD 22.11.09 TO 30.06.10
DID NOT TRADE FROM 22/11/09
THEY HAVE NEVER TRADED
IT IS AN ESTIMATED ASSESSMENT”
13.	A further VAT return was sent out by HMRC to the Appellant for the period from 1 July to 30 September 2010, which was signed by Lin Chen and dated 8 October 2010.  It was received back by HMRC shortly after that date.  It again showed “None” in all the boxes.
14.	Upon receipt of the Notice of Appeal, HMRC wrote to Grandway Trading Limited on 28 October 2010.  For the purposes of reviewing the case, they asked for certain information, in particular the full name of the previous owner of the business described on the form VAT1 and, if known, the VAT registration number of the previous owner of the business.  In that letter, HMRC also observed that “the business of Wai Ho Takeaway in Front Street, Cramlington is currently trading and I would be grateful if you could provide evidence of when your clients transferred the business and to whom.  If I can establish that your clients never made any taxable supplies then I will arrange for the penalty to be withdrawn.”
15.	Grandway replied to this letter by letter dated 5 November 2010, asking for a copy of the form VAT1 submitted by Liu & Company, but did not reply to the request for information.
16.	HMRC sent the copy VAT1 on 9 November 2010, then on 26 November 2010 asked for a response to the questions raised in their earlier letter.
17.	On 31 January 2011, Grandway Trading Limited wrote to HMRC as follows:
“Would you please withdraw the penalty for the above?
Please note that Best Catering (10) Limited commenced trading on 22 November 2009, please find enclosed a copy of the licence agreement.”
18.	With this letter, they enclosed a copy of a document dated 22 November 2009 and between An Chen & Lin Chen (referred to as “the Licensors”) and Best Catering (10) Limited (“Best”).  Pursuant to this document (“the Agreement”) the Licensors purported to appoint Best “to run the Business” (which was defined as “the Business carried on the Premises known as Wai Ho Takeaway”).  “The Premises” were defined as Unit 2, Fornt [sic] Street, Klondyke, Cremlington, Northumberland, NE23 6RF”.
19.	The appointment of Best was expressed to last for 2 years from 22 November 2009, but was subject to termination at any time on one month’s notice from the Licensors.  Best agreed to pay to the Licensors a licence fee of £150 per week (exclusive of VAT), weekly in advance.  Best would “retain all monies received in the Business”, but would reimburse the Licensors forthwith on demand for all outgoings, including “rates taxes maintenance services building insurance premium gas electricity water telephone charges.”  Best agreed to take on the role of employer of all employees of the Business, and to pay all wages and employer’s National Insurance contributions for employees of the Business.  It agreed to keep the Premises in the same state of repair as at the commencement of the Agreement, fair wear and tear excepted.
20.	The Agreement was signed as a deed by An Chen and Lin Chen and by an unidentified individual “by direction of” Best.  The name of the person signing on behalf of Best cannot be made out (it appears to be written in Chinese characters), nor can the name of the witness to his or her signature, though the witness gives as his or her address “Winston Churchill House, Ethel Street, Birmingham”.  The address of Grandway Trading Limited is Unit 3, First Floor, Winston Churchill House, Ethel Street, Birmingham, B2 4BG.
21.	HMRC produced a “Fame” company report for Best which it had obtained on 2 February 2011, which showed it as having been incorporated on 17 August 2009.  Its directors at 2 February 2011 were one Wei Liu (appointed 2 November 2009) and Lakecourt Management Limited (appointed 17 August 2009), both of the same address as Grandway Trading Limited (though Lakecourt Management Limited’s address was given without the initial “Unit 3”).  The Secretary was Lakecourt Management Limited.  Mr Simon Poon had been appointed a director on incorporation of Best, but had resigned on 1 November 2009.  
22.	The shares of Best appear to have been held by “the Trustees of Best Catering (10) Ltd” according to the annual return filed on 17 August 2010.  
23.	Wei Liu was reported as having only this directorship.  Lakecourt Management Limited was shown as holding directorships in 87 other active companies, one inactive company and as having held 9 previous directorships.  Simon Poon was shown as holding 43 other directorships in active companies, 6 directorships in inactive companies and as having held 819 previous directorships.
24.	HMRC also provided another print-out of information concerning Lakecourt Management Limited, showing no date or explanation of its contents.  It did however clearly show Mr Simon Poon as being Company Secretary of Lakecourt Management Limited, and Mr Poon confirmed he was indeed connected with that company.
25.	On 9 February 2011, HMRC wrote to Best at its registered office address in Winston Churchill House, as follows:
“I understand you have been trading at the above premises since 22 November 2009 however I have been unable to trace a VAT registration number for your business.
Please arrange to register for VAT which can be done online at ..... or, alternatively, provide evidence as to why you do not consider you should be registered.”
26.	On the same date, they wrote to Grandway Trading Limited, referring to the business bank account which had been identified on the Appellants’ form VAT1, and asking for copies of the statements for that account since November 2009.
27.	No reply to either letter has been received by HMRC.
28.	Some written material from the Northumberland County Council Environmental Health team was provided to us.  They had visited the business on 14 or 15 April 2010, 10 May 2010 and 9 August 2010.  At the 14/15 April 2010 meeting, a Mr Wen was present at the premises.  He was the “stand-in manager” and identified Mr An Chen as the food business operator.  At the 10 May 2010 meeting, Mr & Mrs Chen were present and confirmed they were the owners for the purpose of service of a “Hygiene Improvement Notice” on that day.  No mention of Best was made in any of the material from Northumberland County Council.
29.	We were also supplied with a copy of the entries on the Appellants’ partnership tax return for the year ended 5 April 2010.  Their business was described in that return as “Cooking”, and its commencement and cessation dates were given as 5 April 2009 and 5 April 2010 respectively.  The return showed a total turnover for the business of £1, claimed deductible expenses of £99 and therefore showed a net loss of £98.  This loss was apparently financed by £200 of capital introduced by the partners, leaving them with £102 cash at the end of the period.  Neither Ms Perrett nor Mr Poon was able to tell us when this return had been filed or by whom.  It is notable however that it makes no mention of any income from Best (which was supposedly paying them £150 per week from 22 November 2009 under the Agreement).
30.	Whilst the evidence before us was largely documentary, Mr Poon was able to reply to some questions from his knowledge of the case.
31.	He was clearly familiar with the alleged ownership structure of the business.  He said the Agreement had been prepared by “my legal team”, who he said operated from adjacent premises but were not formally part of his business.  He said it could have been either Dextron Limited or Gold Index Management Limited who drew up the Agreement.  He did not name any individuals involved.  He said the Chens had become clients of Grandway by referral from Dextron/Gold Index.  He said he had no personal knowledge of the circumstances surrounding the drawing up of the Agreement, including when it was drawn up.  He had simply been given a copy of it, which he had passed on to HMRC.  He said there was a language problem as he only spoke Cantonese whereas the Chens spoke Mandarin; his Mandarin-speaking manager had recently left and returned to China, so he was unable to give us further details.
32.	He said he had received HMRC’s letters dated 9 February 2011 to Best and Grandway.  As to the provision of copies of bank statements for the Chens’ business bank account, he said he had not replied because it was “not relevant”.  As to the letter asking Best about its VAT registration, he said he had ignored it because Best was trading under the VAT registration threshold and it was “not my style” to answer such letters.  He said his practice was to wait until HMRC’s “Hidden Economy Team” got involved.
33.	Mr Poon was present in his capacity as representative and he did not give formal testimony on oath or under affirmation, nevertheless we took his factual comments into account in our overall assessment of the documentary evidence before us.
Submissions
34.	Mr Poon submitted that:
(1)	the VAT1 and VAT2 forms originally submitted were incomplete.  They were lacking NI details and were not dated and the information about the supposed transfer of a going concern was sketchy.  This should have led to a much more careful response from HMRC than was the case.  He pointed out that fraudulently obtained VAT registrations were a major problem in areas such as VAT repayment fraud.  He said HMRC should have investigated much more carefully and either rejected the forms outright or they would have found out the true position and refused the registration anyway;
(2)	there was no evidence that Liu & Co had been properly authorised to submit the original application (in particular, no form 64-8 for them had been produced);
(3)	the business had actually been carried on by Best and not by the Appellants, therefore they could not be registered for VAT; 
(4)	Liu & Company had simply misunderstood the arrangements that had been entered into by Mr & Mrs Chen and had therefore prepared completely incorrect forms;
(5)	no evidence of a VAT number for the previous owner of the business had been produced and the previous owner was not in fact VAT registered.
35.	Ms Perrett submitted that on balance the evidence pointed to the Appellants having been running the business from 22 November 2009, having taken it over as a going concern which was generating taxable supplies above the VAT registration threshhold and therefore the penalty was properly due.  
36.	She pointed out that the first mention of the Agreement had been when Mr Poon had sent it with his letter of 31 January 2011.  When asked to produce the business bank account statements (to support their argument that they were not trading) the Appellants had failed to do so.  No income from the arrangement with Best had been included in their partnership return.  They had not answered enquiries about the transfer from “Chen”.  So far as HMRC were concerned, there was nothing which pointed to the original information given to them being incorrect and therefore the penalty should stand.
Law
37.	The penalty was imposed under s 67(1) Value Added Tax Act 1994 (“VATA”), which provided (so far as relevant) as follows:
“(1)	In any case where –
(a)	a person fails to comply with any of paragraphs 5, 6, 7... of Schedule 1...
he shall be liable, subject to subsections (8) and (9) below, to a penalty equal to the specified percentage of the relevant VAT...”
38.	“Relevant VAT” was defined in s 67(3) as follows:
“(3)	In subsection (1) above “relevant VAT” means (subject to subsections (5) and (6) below) –
(a)	in relation to a person’s failure to comply with paragraph 5, 6 or 7 of Schedule 1, ... the VAT (if any) for which he is liable for the period beginning on the date with effect from which he is, in accordance with that paragraph, required to be registered and ending on the date on which the Commissioners received notification of, or otherwise became fully aware of, his liability to be registered;”
39.	“Specified percentage” was defined in s 67(4), as follows:
“(4)	For the purposes of subsection (1) above the specified percentage is –
(a)	5 per cent where the relevant VAT is given by subsection 3(a) ... above and the period referred to in that paragraph does not exceed 9 months...”
40.	Subsection (8) provided that no penalty should arise where the trader satisfies HMRC or the Tribunal that he has a reasonable excuse for the relevant conduct.
41.	Schedule 1, paragraph 1 provided (so far as relevant to this appeal):
“(2)	Where a business, or a part of a business, carried on by a taxable person is transferred to another person as a going concern and the transferee is not registered under this Act at the time of the transfer, then, subject to sub-paragraphs (3) to (7) below, the transferee becomes liable to be registered under this Schedule at that time if –
(a)	the value of his taxable supplies in the period of one year ending at the time of the transfer has exceeded £68,000 ...
...
(3)	A person does not become liable to be registered by virtue of sub-paragraph .... (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 sub-paragraph, he would become liable to be registered will not exceed £66,000 ...”
42.	Paragraph 7 of Schedule 1 VATA provided as follows:
“(1)	A person who becomes liable to be registered by virtue of paragraph 1(2) above shall notify the Commissioners of the liability within 30 days of the time when the business is transferred.
(2)	The Commissioners shall register any such person (whether or not he so notifies them) with effect from the time when the business is transferred.”
43.	The final piece in the jigsaw is section 49(1) VATA, which provided as follows:
“(1)	Where a business, or part of a business, carried on by a taxable person is transferred to another person as a going concern, then –
(a)	for the purposes of determining whether the transferee is liable to be registered under this Act he shall be treated as having carried on the business or part of the business before as well as after the transfer and supplies by the transferor shall be treated accordingly...”
44.	It should be noted that “taxable person” in the above provision includes not only persons who are actually registered for VAT, but also persons who are required to be so registered – see section 3(1) VATA.
45.	The basis for the penalty is therefore as follows.  The Appellants confirmed in their form VAT1 that they had taken a transfer of a business as a going concern on 22 November 2009 from “Chen”, and they gave that fact as the basis of their application for registration.  The only basis on which the transfer would give rise, of itself, to a liability to register for VAT would be if the transferor was a taxable person and the turnover of the business in the previous year had been above £68,000.  HMRC established from the Appellants that the estimated annual turnover of the business was £78,000.  Given the circumstances of the application, it was reasonable to assume that this was based on the historical turnover.  It followed that an obligation to notify had indeed arisen under paragraph 7 of Schedule 1 and HMRC were required to register the Appellants for VAT, as they had requested, with effect from the time of the transfer.  As the Appellants had not notified HMRC within the 30 day period provided by paragraph 7(2), they had triggered a penalty under section 67 VATA.  The relevant penalty rate was 5% because the delay in notifying HMRC was less than nine months, and HMRC estimated the “relevant VAT” by reference to the turnover figure supplied by the Appellants.  They then applied a reduction of 25%, reducing the final penalty to £207.  No issue has been raised by the Appellants as to the calculation of the penalty.
Decision
46.	We agree with Mr Poon that the way HMRC dealt with the VAT registration application was perhaps less careful than might have been the case.  On the other hand, they did contact the Appellants to obtain what they regarded as the key piece of missing information from the form, and that information appeared to justify the making of the application.  There will no doubt have been some language difficulties (Mr Poon referred to them in relation to his own dealings with the Chens) and therefore is it perhaps understandable that HMRC concentrated on the key information rather than attempting to tie down every detail in the form VAT1 perfectly.  We do not consider that the way they dealt with the application can be criticised to the point of rendering the registration invalid, as Mr Poon appeared to be suggesting.
47.	We do not consider that the absence of any formal written authority for Liu & Company to submit the application forms can affect their validity.  The forms stood on their own, they were signed by the Appellants and the role of Liu & Company in submitting them was little more than “postman”.  
48.	We see no reason to find that the application forms can be regarded as vitiated in some way by an alleged mistake on the part of Liu & Company in submitting them on the basis of a misunderstanding of the true business arrangements.
49.	Thus our view of the arguments depends very much on our findings as to what the business structure arrangements actually were.  We share Ms Perrett’s scepticism about the Agreement.  On the one hand, there is a perfectly normal (though admittedly less than perfect) application for VAT registration of a partnership carrying on a takeaway business, submitted by a professional adviser on behalf of his clients.  In the absence of convincing evidence that the situation was not as straightforward as it appeared, we would be inclined to favour that version of events.  
50.	So what is the surrounding evidence?  First, an extremely unusual Agreement which is fundamental to the whole dispute but which was not mentioned in the Appellants’ Notice of Appeal, indeed there was no mention of it until nearly four months after the Notice of Appeal was submitted.  Second, Mr Poon is careful to distance himself personally from the preparation of the Agreement, so that no formal evidence is given by any person involved in its preparation to support its bona fides.  Third, no response whatever was forthcoming in reply to HMRC’s enquiries to Best, seeking to establish its view of its own VAT status.  Fourth, no response was forthcoming to HMRC’s request for copies of the Appellants’ business bank statements to support their contention that they have not been trading.  Fifth, the Appellants’ partnership tax return was entirely inconsistent with the content of the Agreement, by showing no income arising under the Agreement.  Sixth, when Environmental Health officers visit the business, no mention is made of it being carried on by anyone other than the Appellants.
51.	On balance, therefore, we find as a fact on the basis of the evidence before us that the Agreement cannot be relied on as a true representation of the terms of any arrangement between the Appellants and Best.  We find that no transfer of the business took place as purportedly effected by the Agreement, which we find to have been created after the event.  It follows that we see no reason to interfere with the penalty imposed by HMRC, which we therefore confirm.  The appeal is dismissed.
52.	As we observed to Mr Poon, there may well be subsequent assessments raised on the Appellants for unpaid VAT since 22 November 2009 and there is nothing to prevent the production of further evidence in any resultant appeal intended to persuade HMRC and the Tribunal that the Agreement can in fact be accepted at face value.  Each case must be decided on the evidence put forward and perhaps Mr Poon may wish to reconsider his approach to positive co-operation with HMRC and early production of relevant evidence in the light of this experience.  We have decided this case on the basis of the evidence put before us and on that basis we find the actions of HMRC to be entirely justified.
53.	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: 4 APRIL 2011