[2012] UKFTT 444 (TC)
TC02125
Appeal number
TC/2010/7893
VAT
–Registration – Sch 1 para 1(3) forward looking test – consideration of
irrelevant information – voluntary registration
FIRST-TIER TRIBUNAL
TAX CHAMBER
MARK
MILLS-HENNING Appellant
-
and -
THE
COMMISSIONERS FOR HER MAJESTY’S
REVENUE
& CUSTOMS Respondents
TRIBUNAL: JUDGE CHARLES
HELLIER
DAVID EARLE
Sitting in public in Plymouth on 5 December 2011
George Williams, accountant,
for the Appellant
Lynne Ratnett for the
Respondents
© CROWN COPYRIGHT 2012
DECISION
1. This
appeal concerns liability for VAT registration. A person becomes liable to be
registered for VAT if his turnover exceeds a threshold. The appellant's
turnover was normally well below the threshold but in 2007 he was particularly
busy and it exceeded the threshold. Because his turnover was normally below the
threshold he did not have a mechanism in place to monitor it. He became liable
to pay VAT which he was in the event unable to recover from those whom he had supplied.
2. We
start with the relevant law.
The law.
3. At
times relevant to this appeal the applicable parts of schedule 1 VATA 1994
provided that a person who was not registered for VAT became liable to register
if (paragraph 1(1)(a)):
"at the end of any month,
... the value of his taxable supplies in the period of one year then ending
exceeded £64,000."
4. But
it was provided that that person would not become so liable if (paragraph 1
(3)):
"the Commissioners are
satisfied that the value of his taxable supplies in the period of one year
beginning at the time at which [he would otherwise] become liable to be
registered will not exceed £62,000."
5. Paragraph
5(2) requires the Commissioners to register a person who thus becomes liable to
be registered "with effect from the end of the month following" the
month at the end of which he becomes liable to be registered.
6. Thus,
at the end of every month - take October as an example - a backwards looking
test is performed: did his supplies in the year to 31 October exceed £64,000?
If the answer to that question is "yes", then potentially he becomes
liable to be registered with effect from the end of 30 November i.e. on 1
December. But if on 1 December, looking forward, the value of his suppliers in
the next 12 months will not exceed £62,000 he may not be registrable.
7. We
say "may" because the test to be applied by paragraph 1(3) is not
whether the next 12 months' supplies will be less than £62,000, or whether they
were, or whether the taxpayer knows or believes that they will be, but instead
whether HMRC are satisfied that they will be.
8. That
raises the question of when and by reference to what facts HMRC are to conduct
the forward-looking test. That question was answered by Ferris J in Gray
trading as William Gray & Son v Commissioners of Customs and Excise [2000] STC 880 at [23]:
"I conclude ... that ... the Commissioners must give
effect to paragraph 1(3) by considering the case as at the date from which the
registration would otherwise take effect and, by looking forward, ask
themselves whether they are or are not satisfied that the turnover will not
exceed the threshold amount."
9. Ferris
J went on to say at [24]:
"it must follow in my view, that the only
information which [HMRC] can or should act upon is the information which is
available to them at that time."
10. Thus the
forward-looking exception from registration has effect only if by reference to
material available to the Commissioners on 1 December they were satisfied on
that date that the next 12 months' turnover would be less than £62,000.
11. But how can a
taxpayer appeal against the operation of these provisions? He can deal with the
backward looking test quite simply by producing evidence, if he can, that his
turnover in the preceding 12 months (in our example to 31 October) was less
than £64,000. But how can he address whether HMRC were or were not satisfied on
the basis of information available to them on 1 December, that the next 12
months' turnover would be less than £62,000?
12. The legislation
does not impose a wholly objective test: it asks whether the Commissioners were
satisfied. Thus the tribunal cannot simply say "well we think it would
have been less than £62,000, and thus allow the appeal", because the
question is whether the Commissioners were satisfied. But the law does not
permit the Commissioners to make an arbitrary decision. If HMRC make a decision
on the information available to them at 1 December that no reasonable body in
their position could have made, this tribunal may set it aside; but as Ferris J
said that [23], "if they reach a conclusion which would be open to a
reasonable body of commissioners considering the relevant evidence, an
appellate tribunal cannot interfere with their decision.". Conversely a
decision made by reference to irrelevant factors cannot be a reasonable one.
13. This legislative
mechanism imposes burdens on a trader who is not registered, for it requires
(in paragraph 5(1)) him to notify HMRC within 30 days after the end of any
month if he has become liable to be registered because his turnover has
exceeded the threshold. Thus at the end of each month (say again 31 October) he
needs to look back over the last 12 months to see if his turnover is more than
£64,000. If it is he then needs to think about the 12 months starting on 1 December
and ask what the situation is likely to be for that period. If he concludes
that it is likely that his turnover will be less than £62,000 he then needs to
acquaint HMRC with the position and to make sure that by 1 December HMRC have
all the information necessary for them to share his view if he wishes to escape
registration from 1 December. It is no use telling HMRC relevant facts on 2
December or any later date; he has to get the information to them by 1
December; and even if he does he will be to some extent in their hands if the
information he provides is not such as to lead unequivocally to the conclusion
that the turnover for the 12 months beginning on 1 December will be less than
£62,000.
14. If the appellant
was in fact an employee his supplies would not have been liable to VAT. He
would not have been registrable and would not have satisfied the conditions in
paragraph 1 or 9 of Sch 1. An employee for these purposes is a person
"bound by a contract of employment or by any other legal ties creating a
relationship of employer and employee as regards working conditions,
remuneration and the employer's liability" (see article 4(4) of the Sixth
Directive, which was applicable at the relevant time). Inter alia this requires
consideration of: (1) what terms regulated his working conditions; (2) the
extent to which he had any economic risk in relation to his activities; (3) his
liability for damage caused in the course of, or as a result of, his work, and
(4) the degree of control he could exercise over his work (see eg Ayuntamiento
de Sevilla v Recaudadores 1993 STC 659).
The Facts
15. The appellant
worked as a contractor for John Richards Shopfitters, and was paid on a weekly
basis by reference to invoices he provided. He was treated as being
self-employed and payments to him were made under the provisions of the
Construction Industry Scheme.
16. There was no
discussion before us as to whether or not the appellant was in fact an
employee. Evidence in relation to the matters at para 14 above was not put
before us. We note that the fact that the CIS scheme was as matter of fact
applied to payments made to the appellant does not necessarily mean that the
Appellant was not an employee. Both parties proceeded on the basis that the
appellant was not an employee: we do the same.
17. The appellant
arranged for his accountant, Mr. Williams, to prepare accounts and submit tax
returns. Accounts were prepared to 31 March in each year. In the September or
October following each 31 March, Mr. Williams set to work. He would prepare the
accounts. He would submit the tax returns.
18. At that time Mr
Williams would also review the position to see if the VAT threshold had been
breached. In the years before 2008 Mr. Williams had concluded that this was
unlikely because the appellant was paid on a hourly basis and for the year to
31 March 2007 his turnover was only £49,364. Mr. Williams told us that in those
years he considered that it would not have been sensible to conduct a monthly
check because the turnover was so low.
19. The year to 31
March 2008 was however different. The appellant had been very busy between June
and September 2007. He had been working for over 100 hours per week and in some
weeks had done the work of two people. He was working away from home and his
accommodation expenses formed part of the invoiced turnover. For the year to 31
March 2008 his turnover was £77,825. That exceeded the threshold.
20. After preparing
the accounts for this year in the following September Mr. Williams considered
whether the appellant should register for VAT. He came to the view that this
level of turnover was unlikely to continue and that there was no need for the
appellant to register for VAT. He thus ignored the obligation to notify in para
5(1) and substituted his own conclusion for the conclusion that only HMRC were
given the power to make under para1(3).
21. But when his tax
return was submitted HMRC saw the turnover figure. On 4 June 2010 they wrote to
the appellant to ask whether he was VAT registered and if he was not sought
details of his monthly turnover from April 2006 onwards. This the appellant
supplied.
22. This information
showed that for the 12 months ended 31 October 2007 the appellant’s turnover
was £66,358. This meant that he was registrable under paragraph 1(1) unless the
forward-looking exemption applied.
23. After some other
correspondence HMRC wrote to the appellant on 8 July 2010 saying that they
considered him VAT registrable from 1 December and that the forward-looking
exemption did not apply. In their letter they said:
"the Commissioners can only consider [your request
that the exemption under paragraph 1 (3) should apply] in the light of the
facts that were available at the time you were first required to notify. Namely
that you in fact exceeded the VAT threshold during October 2007 and based on turnover
figures provided are still above the deregistration limit of £62,000 in the
following 12 months. (Please note that turnover is calculated on a rolling 12
month basis).
On the basis of those facts
the Commissioners therefore consider that you should be correctly registered
with effect from 01 December 2007.
However your case could be
considered for Liable No Longer liable action ..."
24. This passage
contained an error. That was because on 1 December 2007 HMRC did not have the
information there described about the appellant’s turnover for the 12 months to
31 October 2007.
25. Following
receipt of these letters the appellant, with Mr. Williams’ advice, was keen to
settle matters and discussed the issue with HMRC's Liable No Longer Liable
department. They were advised to seek registration from 1 December, submit VAT
invoices to John Richards and recover from them the VAT which had become due to
HMRC. Accordingly the appellant sought registration and was registered. VAT
invoices were produced and sent to the company but it went into liquidation.
The appellant was left with a VAT bill due to HMRC and an unsatisfied claim
against John Richards. Since it was only the VAT element of the consideration
in the invoices to John Richards that had not been paid to the appellant he
could not claim sufficient VAT debt relief to absolve him from the VAT due to
HMRC. Mr. Williams described it as a doomsday scenario.
Discussion.
26. In this case it
appears that the appellant fell foul of the requirements in the legislation
because there was no mechanism in place to monitor his turnover for the 12
months to the end of every month. Thus at the end of October 2007 no red light
flashed to warn him; and he was not prompted to think about the 12 months from
1 Decembber 2007 and ask himself whether his turnover in those months would be
less than £62,000. There was no voice which told him quickly (and in any event
by 1 December 2007) to tell HMRC why it would be less than £62,000.
27. There was no
dispute before us that in the 12 months to 31 October 2007 the appellant's
turnover had exceeded £64,000, therefore the only question for us was whether on
1 December having regard to the information HMRC held on that date it would
have been "unreasonable" (in the sense described in para 12 above) for
HMRC not to have concluded that his turnover in the next 12 months would have
been less than £62,000.
28. On 1 December
2007 the only information on which HMRC could make a decision was that they
already held. And that was the records of his trading turnover in prior years
from his tax return for years ending April 2007 and any information they could
glean from any CIS returns made by those who engaged his services.
29. The evidence
from the Appellant’s tax returns which HMRC held at 1 December was that in the earlier
years his turnover did not exceed the threshold. Any evidence from CIS returns
would indicate an increased level of activity but we had no evidence of what
information from this source HMRC had at that time.
30. A decision made
on the basis of irrelevant facts is an unreasonable one. The decision made by
HMRC took account of the information about the turnover in the 2008 accounts
and for the period to 31 October 2007, which was information not available to
them at 1 December: it was therefore irrelevant to their decision at 1 December
2007. Their decision was therefore unreasonable.
31. As a result
unless we were satisfied that HMRC would inevitably have made the same
decision on 1 December 2007 by reference only to the facts which were then in
their possession, we should set aside the decision compulsorily to register the
appellant.
32. However, the
question posed by the statute for HMRC is whether they are satisfied that the
future turnover “will not” exceed the threshold: a conclusion that it might not
exceed it is not enough to pass the test, and a conclusion that it might exceed
it is sufficient for the test to be failed. We considered that the historic
information permitted only the conclusion that the future turnover might not exceed
the threshold and that it was insufficient for any reasonable body to be able
to conclude that the turnover would not exceed the threshold.
Accordingly HMRC would inevitably have come to the same conclusion by reference
to the relevant facts.
33. However, it
seems to us that even if we had allowed an appeal against a decision compulsorily
to register the Appellant it would not avail him since the Appellant had requested
registration. Paragraph 9 of Sch 1 provides that if a person who is not liable
to register requests registration and the Commissioners are satisfied that he
is carrying on a business and makes taxable supplies, they must register him.
The Appellant has not argued that the registration effected pursuant to that
request was the subject of this appeal, although Mr Williams did submit that it
was not truly voluntary. But paragraph 9 does not speak of voluntary
registration but registration which the taxpayer “requests”, and we cannot see
that there is any sustainable argument that the appellant did not make a
request to be registered.
34. As a result, even
if HMRC remade its decision under para 1(3) and decided that the Appellant was
not liable to register, he would be registrable by reason of para 9; and if
HMRC decided that he was not within para 1(3), a decision which they would in
our view inevitably make, he would be registrable under para1(1). Either way he
would remain registrable.
35. We therefore
dismiss the appeal.
36. 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.
CHARLES HELLIER
TRIBUNAL JUDGE
RELEASE DATE: 9 July 2012
