[2011] UKFTT 464 (TC)
TC01314
Appeal number: TC/2010/3612
Appeal
against HMRC’s decision to compulsorily register the Appellant for VAT – belated
notification penalties – appeal dismissed in respect of VAT registration –
penalty mitigated to nil
FIRST-TIER TRIBUNAL
TAX
SUSAN
EVANS Appellant
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE
AND CUSTOMS Respondents
TRIBUNAL: Miss J. Blewitt (Judge)
Mr
J. M. Lapthorne (Member)
Sitting in public at Birmingham on 10 June 2011
Mrs S. Evans, the Appellant,
appeared in person
Mr W. Brooke, instructed by
the General Counsel and Solicitor to HM Revenue and Customs, for the
Respondents
© CROWN COPYRIGHT
2011
DECISION
1. By
Notice of Appeal dated 12 April 2010 the Appellant appealed against the
decision of HMRC, dated 21 October 2009, to compulsorily register her for VAT
by virtue of Paragraph 1 (1), Schedule 1 of the Value Added Tax Act 1994 (“the
Act”) with effect from 1 January 2002. As a consequence of registering the
Appellant for VAT, assessments were raised and belated notification penalties
imposed at 15% of the unpaid VAT for the periods 1 January 2002 to 31 December
2003 and 1 January 2004 to 31 July 2006.
2. The
Appellant duly requested a review of HMRC’s decision, following which the
decision was upheld and notification sent to the Appellant by letter dated 22
March 2010.
Background
3. On
6 October 1997 the Appellant began trading as a retail shop at 9 Queensway
Mall, Halesowen, West Midlands. The Appellant continued to trade until 5 April
2008 and throughout the period of trading did not register for VAT.
4. From
information contained within the Self Assessment returns submitted by the
Appellant, it appeared to HMRC that the Appellant was trading above the VAT
registration threshold. Consequently, on 3 August 2009 HMRC wrote to the
Appellant requesting confirmation of the nature of the Appellant’s business and
highlighted that their records indicated that trade had exceeded the VAT
registration threshold.
5. The
Appellant responded by letter dated 6 August 2009 in which she stated that she
was perplexed as to why any records would show trade as being above the VAT
registration threshold. Mr Evans stated that the business was a small retail
unit which no longer existed due to redevelopment of the area. Mrs Evans stated
that trade was small, especially in the later years, and that she recalled
making a loss in some years. Mrs Evans confirmed that all account figures had
been sent to HMRC.
6. In
a telephone conversation with the Appellant on 25 August 2009, HMRC established
that the Appellant’s business had been trading for 8 years and that it was a
small shop which sold items such as candles and wind chimes.
7. On
1 October 2009, HMRC wrote to the Appellant setting out how the period of
registration had been assessed by using the figures declared by the Appellant
in her Self Assessment returns.
8. The
Appellant responded by letter dated 6 October 2009 in which she provided
breakdown figures for the years requested by HMRC. The Appellant confirmed that
the figures were only a guide as no records were available, having been
destroyed by the Appellant a few months earlier, following her retirement. The
Appellant queried the accuracy of the figures used by HMRC and why HMRC’s
enquiries had taken so long to commence.
9. The
Appellant was notified by letter dated 21 October 2009 of her liability to
register for VAT with effect from 1 January 2002, an assessment to VAT in the
total sum of £21,542.59 and a penalty in the sum of £3,231. The assessment to
VAT was calculated by applying the relevant flat rate scheme percentage at the
rates applicable during the period of liability for registration. The letter
also invited the Appellant to submit a VAT return for the period 1 January 2002
to 31 January 2006 and to submit a statement of liability in order to calculate
the penalty due.
10. On 26 October
2009 the Appellant provided HMRC with a VAT figure in the sum of £65,561 which
she stated had been paid on goods and services and which she claimed should be
reclaimable as input tax.
11. HMRC rejected
this contention, stating in a letter to the Appellant dated 14 December 2009
that the VAT could only be reclaimed as input tax where there was documentary
evidence in support of the claim.
12. On 18 January
2010 HMRC wrote to the Appellant setting out the calculation of VAT arrears and
explaining that the flat rate scheme had been applied which makes an allowance
for input tax.
13. On 14 February
2010 the Appellant wrote to HMRC disputing the figures asserted and stating
that she had also traded in books, upon which the profit margin was quite low.
In particular, the Appellant stated that by 2003 book sales formed a large
percentage of her turnover.
14. Initially HMRC
upheld their decision on review, but following further correspondence between
the parties and further estimates of book sales submitted by the Appellant,
HMRC accepted that 60% of the Appellant’s turnover related to book sales.
Consequently, Mr Brooke invited us to confirm the assessment in the amended sum
of £9, 365.18. As a result of the amendment to the assessment, the penalty for
belated notification was also amended to £1,404.18.
Appeal
15. The grounds of appeal
relied upon by the Appellant can be summarised as follows;
·
The Appellant did not accept the VAT registration number assigned
to her as she had not registered for VAT;
·
That he records were destroyed in April 2009 after the business
closed in 2006;
·
HMRC’s contention that in the absence of any records, the figures
asserted by HMRC must be used is disputed;
·
It is disputed that input tax cannot be claimed due to the
absence of records;
·
The Appellant suffers ill health and has only a limited income
consisting of her pension;
·
HMRC have not provided copes of her Self Assessment returns and
so the Appellant is unable to satisfy herself as to the figures contained
therein;
·
It is unreasonable for HMRC to have commenced this enquiry after
so many years;
·
It is possible that HMRC have made an error regarding turnover;
·
There is no evidence from HMRC in support of their claim that the
Appellant should be VAT registered;
·
The Appellant’s net profit was small and books which are zero
rated would have represented 70 – 80% of sales turnover in the Christmas
period;
·
At the time of trading the Appellant was not married and had a
different name which may have contributed to an error by HMRC;
·
Input tax was high and names of suppliers were offered to HMRC
but not taken up;
·
The Appellant ceased trading due to forced closure for which she
did not receive compensation;
·
Complaints have been made by the Appellant’s husband, who
supports this appeal.
16. We also had
regard to the numerous letters sent by the Appellant to HMRC which reiterated
the grounds of appeal relied upon and provided further background information.
Law
17. The following
provisions of the VAT ACT 1994 were relied upon in this appeal:
Schedule 1, paragraph 1:
(1)
Subject to sub-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 [£70,000]; or
(b)
at any time, if there are reasonable grounds for believing that the value of
his taxable supplies in the period of 30 days then beginning will exceed [£70,000].
Schedule 1, paragraph 5:
(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.
Section 30:
(1)
Where a taxable person supplies goods or services and the supply is zero-rated,
then, whether or not VAT would be chargeable on the supply apart from this
section—
(a)
no VAT shall be charged on the supply; but
(b)
it shall in all other respects be treated as a taxable supply;
and
accordingly the rate at which VAT is treated as charged on the supply shall be
nil.
Section 67:
(1) In any case where—
(a) a person fails to comply with any of paragraphs 5, 6[, 7]1
and 14(2) and (3) 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 or, if it is
greater or the circumstances are such that there is no relevant VAT, to a
penalty of £50.
Section 70:
(1)
Where a person is liable to a penalty under section 60, 63, 64[, 67 or 69A] [or
under paragraph 10 of Schedule 11A], the Commissioners or, on appeal, a tribunal
may reduce the penalty to such amount (including nil) as they think proper.
(2)
In the case of a penalty reduced by the Commissioners under subsection (1)
above, a tribunal, on an appeal relating to the penalty, may cancel the whole
or any part of the reduction made by the Commissioners.
(3)
None of the matters specified in subsection (4) below shall be matters which
the Commissioners or any tribunal shall be entitled to take into account in
exercising their powers under this section.
(4)
Those matters are—
(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;
(c)
the fact that the person liable to the penalty or a person acting on his behalf
has acted in good faith.
Section 71:
(1)
For the purpose of any provision of sections 59 to 70 which refers to a
reasonable excuse for any conduct—
(a)
an insufficiency of funds to pay any VAT due is not a reasonable excuse; and
(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.
Section 83 (a) and (p) (i)
[(1)]
Subject to [sections 83G and 84], an appeal shall lie to [the tribunal] with
respect to any of the following matters—
(a)
the registration or cancellation of registration of any person under this Act;
(p) an
assessment—
(i)
under section 73(1) or (2) in respect of a period for which the appellant has made
a return under this Act;
Evidence
18. We heard
evidence from Mrs Evans who explained that she had doubted the figures asserted
by HMRC from the outset. Mrs Evans stated that following numerous requests she
was provided with copies of her Self Assessment returns from 2006, but not the
years prior to that. Mrs Evans explained that she had not kept copies of her
returns as all of her records had been destroyed prior to HMRC contacting her.
19. Mrs Evans set
out her concern that HMRC may have recorded her data incorrectly, the basis of
this concern being that in 2001 she was away from her shop for approximately 4
months due to illness, over which time family and friends provided help in
running the shop and that as a result, the turnover figure asserted by HMRC
would not have been reached.
20. Mrs Evans
accepted that the copies of Self Assessment returns provided to her by HMRC for
the years 2005/2006, 2006/2007 and 2007/2008 matched the figures used by HMRC
in their calculations.
21. Mrs Evans
invited us to disregard the figures she had sent to HMRC as an estimate of her
turnover, and explained that she had, in an attempt to cooperate, effectively
tried to work back from the figures provided by HMRC. Mrs Evans stated that she
regretted providing estimates, which had taken her a significant period of time
to prepare, as she disputed those figures.
22. Mrs Evans stated
that a high percentage of her turnover would have resulted from the sale of
books and that she disputed HMRC’s assertion that input tax would not affect
their calculation or that she was not entitled to reclaim input tax.
23. Mrs Evans
explained that her shop was closed due to redevelopment and that she had not
received compensation for the forced closure. She stated that sales rose
slightly in her final year of trading as all stock and equipment was sold off.
The shop was closed with a loss of £2,000 and Mrs Evans had paid the
outstanding bills out of her own money. Mrs Evans also recalled making a loss
at some point during the closing down period, although this was not shown on
the figures provided by HMRC.
24. Mrs Evans took
issue with the time it had taken HMRC to raise the issue of VAT registration
and pointed to the fact that other organisations would not make such enquiries
so long after the periods to which the enquiries relate.
25. We also heard
from Mr Evans who confirmed that the Appellant’s business had involved a
significant amount of work with little profit, as a result of which he had
advised the Appellant to close the shop. Mr Evans provided background as to how
he believed HMRC’s enquiries had commenced. He explained that he had been
involved in a dispute with a male who was aware that Mrs Evans ran a shop and that
this male had reported the Appellant to HMRC in order to seek revenge.
Submissions
26. It was submitted
by Mr Brooke on behalf of HMRC that the turnover figures used were those
provided by the Appellant in her Self Assessment returns. The figures showed
that the Appellant’s turnover exceeded the VAT threshold in each of the years
in question, despite which the Appellant failed to register for VAT or submit a
first period return. Mr Brooke contended that once the VAT threshold was
reached, there is an obligation upon a taxpayer to review their accounts and
establish whether the turnover and taxable supplies exceeded the VAT threshold
for the previous 12 months.
27. HMRC contended
that book sales, although zero rated, were correctly included in the
calculation of taxable supplies, by virtue of Section 30 of the Act. Mr Brooke
submitted that input tax on books could not be reclaimed as they were zero
rated. Mr Brooke accepted that initially HMRC had taken a stringent view as a
result of the lack of records available. Mr Brooke explained that following the
Appellant’s confirmation that books had been sold, an allowance was made to
take account of the likely percentage applicable. Mr Brooke submitted that the
Appellant’s estimate in relation to books had been too high as the shop was not
primarily a book shop, but that HMRC had allowed for 50% for the years ending
2002 and 2003, and 60% for the years ending 2004 to 2008. HMRC had also
considered the issue service charges concluding that as a single supply it is
exempt. In addition, HMRC had applied the flat rates applicable to the relevant
periods in order to give the Appellant credit for outgoings. Mr Brooke
submitted that all calculations had been based on the information provided by
the Appellant and that, in the absence of any records being available, best
judgement had been used.
28. In respect of
the Appellant seeking to dispute the quantum of the assessment raised, HMRC
submitted that there is no right of appeal, relying on Section 83 (p) (i) of
the Act, on the basis that no VAT return has been submitted by the Appellant.
29. Mr Brooke
submitted that the Appellant had an obligation to keep records for the period
set down by statute, and that had this been done, records would have been
available to the Appellant in respect of most of the years relevant to the
issue of VAT registration.
30. Mr Brooke
explained that the process of recording data ensures that errors are not made.
We were helpfully referred to an example showing that if any figures shown on
submitted returns are changed, HMRC’s computer system highlights the error as a
“repair”. Mr Brooke also explained that the change in the Appellant’s name as a
result of her marriage could not lead to any mistake as the unique taxpayer
reference number remains the same, irrespective of any change in a taxpayer’s
personal details.
31. As regards the
penalty imposed, HMRC submitted that the Appellant has not shown any reasonable
excuse for her failure to register for VAT. The penalty based on 15% of the
unpaid VAT was charged in accordance with Section 67 (4) of the Act as the
Appellant failed to register more than 9 months following the date upon which
she was liable to register for VAT. HMRC submitted that mitigation of the
penalty was considered but rejected on the basis that insufficiency of funds or
acting in good faith cannot form part of the consideration.
32. Mrs Evans submitted
in closing that despite her shock, she had tried to cooperate with HMRC
throughout their enquiries in an attempt to bring the matter to a conclusion.
33. Mrs Evans submitted
that HMRC have pursued her, no doubt at a significant cost, without good
reason, in order to recover a relatively small amount of money in comparison to
amounts owed to HMRC by others.
34. Mrs Evans
reiterated the fact that she took no takings from her business and that, as a
result of her limited earnings, she had used her own money for living expenses.
Mrs Evans submitted that she remains confused as to how HMRC assess her as
owing VAT when she remains confident that she should never have been registered.
Decision
35. We carefully
considered the submissions made by both parties and all of the correspondence
contained within the bundle provided to us.
36. The issue for us
to determine was whether the Appellant was correctly compulsorily registered
for VAT and our starting point was to look at the figures relied on by HMRC.
37. We noted that
the Self Assessment returns copied and provided to Mrs Evans for the years from
2006 contained the same figures used by HMRC in their assessment as to whether
the VAT threshold was reached and inferred from this, in the absence of any
information or indication to the contrary, that the figures in respect of each
relevant year had been correctly recorded by HMRC.
38. We accepted Mr
Brooke’s explanation that the physical process by which HMRC record data
highlights any error made should the figures recorded differ from those
submitted by a taxpayer on his return. We were satisfied that all of the
figures relied on by HMRC were accurately recorded from the Self Assessment
returns submitted by the Appellant and, in the absence of any evidence to the
contrary, we found that the Appellant was trading above the VAT registration
threshold and that the decision to register the Appellant for VAT with effect
from 1 January 2002 was correct.
39. We found that
HMRC correctly included the sale of books within the calculation of taxable
supplies, as required by Section 30 of the Act.
40. We considered
Mrs Evans’ submission that she recalled a very low turnover in the first years
of trading, but concluded that if turnover had been as low as Mrs Evans
recalled she would have made a significant loss, which was not reflected in the
Standard Accounts Information from her Self Assessment Return provided to us by
HMRC.
41. We went on to
consider whether the assessments raised as a result of the registration for VAT
were calculated using best judgement.
42. We were
sympathetic to the Appellant’s difficulties arising as a result of the
destruction of records relating to her business. That said, we noted that HMRC
had changed their initial stringent, and in our view unreasonable, calculation
to take account of information provided by the Appellant.
43. Mrs Evans
contended that she would have informed HMRC that her business included the sale
of books at the outset. HMRC disputed this fact and submitted that it was not
raised until February 2010. Irrespective of when this information came to
light, although it appears from Mrs Evans’ correspondence to have been raised
in 2009, we found that HMRC had acted reasonably in taking this information
into account in their calculations.
44. The percentage
of turnover relating to book sales submitted by the Appellant was unsupported
by evidence and we accepted HMRC’s submission that the shop did not trade
primarily in books, which was, to a degree, corroborated by the Appellant in a
letter to HMRC dated 6 August 2009 in which she described the shop as “New
Age goods, selling candles, crystals, wind chimes, aromatherapy oils and
relating books covering hundreds of natural and mystic subjects”, from which
we inferred that books had been one of many, rather than the principal, items
sold.
45. Mr Evans
accepted during the hearing that there was no dispute that books, as zero rated
items, would not give rise to a claim for input tax. We found that HMRC had acted
reasonable and used best judgement in applying the relevant flat rate scheme to
make an allowance for input tax where there was no supporting evidence provided
by Mrs Evans.
46. We accepted the
submission that the Appellant has no right of appeal against the assessment
raised, which is specifically prohibited by Section 83 (p) (i) of the Act on
the basis that the Appellant failed to submit a VAT return.
47. We considered
the belated notification penalty assessed as 15% of the unpaid VAT for the
periods 1 January 2002 to 31 December 2003 and 1 January 2004 to 31 July 2006.
The powers granted by Sections 70 and 71 of the Act clearly set out the limits
to our jurisdiction in deciding whether to confirm or vary the amount of the
penalty imposed. We are specifically prohibited (by Section 70 (4) (a) to (c))
from taking into account insufficiency of funds, the fact that there has been
no significant loss of VAT or that the Appellant acted in good faith and
consequently these factors did not form part of our decision.
48. We found that
the delay by HMRC in contacting the Appellant to be excessive and without
justification. We accept that the Appellant was legally obliged to keep some, although
not all, of her records relating to this appeal for the period set down by
statute but we were sympathetic to the fact that HMRC did not contact Mrs Evans
until 3 August 2009. Mrs Evans had ceased trading in 2006, some 3 years before
HMRC made contact. For that reason we took the view that the belated
notification penalty should be reduced to nil.
Conclusion
49. The appeal
against HMRC’s decision to compulsorily register the Appellant for VAT is
dismissed and the assessments upheld in the amended amount of 9,365.18. The
belated notification penalty is reduced to nil.
50. 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.
TRIBUNAL JUDGE
RELEASE DATE: 11 July 2011
