VAT – Assessment raised on partnership under s.73 VATA – Whether partnership dissolved before the periods assessed – held it was – Whether partnership continued registered for VAT – held it did – Whether supplies made by former partner subsequently trading on his own account but at a level below the VAT registration threshold properly assessed by the assessment – held they were to the extent that they were made before the Commissioners were notified of the partnership dissolution – s.36(1) Partnership Act 1890 applied – s.45 VATA considered – appeal allowed in part – assessment reduced

LONDON TRIBUNAL CENTRE

T.A.Z. HUSSEIN and M. ASIM
	Trading as PRESSING DRY CLEANERS	Appellants

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	MR JOHN WALTERS, QC  (Chairman)
						MRS ELIZABETH MACLEOD, CIPM

Sitting in public in London on 25th July 2003

Mr Kojo Amoah-Arko, of Kojo & Co. Chartered Certified Accountants, for the Appellant

Mr C Palmart, Advocate of HM Customs and Excise Solicitor’s Office, for the Respondents

© CROWN COPYRIGHT 2003

DECISION

1.	This is an appeal brought pursuant to section 83(p) Value Added Tax Act 1994 (“VATA”) against an assessment raised under section 73 VATA on Pressing Dry Cleaners and the amount of the assessment.  The Notice of Assessment is dated 22nd October 2002 and charges tax of £21,491 plus interest.  The periods assessed are 11/99 to 08/02 inclusive.

2.	Pressing Dry Cleaners had made returns for the periods in question showing nil output tax chargeable (and nil input tax claimed).

3.	The Commissioners put a bundle of documents before the Tribunal.  In the course of the hearing certain other documents (as referred to below) were produced by the Appellants, and admitted by us.  We heard oral evidence from Mr. T.A.Z. Hussein (an Appellant) and from Mr. A.A. Davis, the Officer of the Commissioners responsible for raising the assessment.  We considered that both these witnesses were truthful. We also received in evidence a Witness Statement made by another Officer of the Commissioners, Robert Jaszkiwskyj. 

4.	The hearing took place on 25th July 2003.  At the conclusion of the hearing the Tribunal reserved its decision.  After the hearing the Tribunal received correspondence from the parties as follows: a letter from Mr. Palmart dated 31st July 2003 and a letter dated 1st August 2003 in response, from Mr. Kojo Amoah-Arko (to whom we refer as Mr. Kojo – as he introduced himself and as he was referred to throughout the hearing).  As will be seen below, we have taken these letters into consideration.

5.	The circumstances in which the returns were made and the assessment came to be raised were, according to the evidence before the Tribunal, as follows. 

The Facts

6.	Pressing Dry Cleaners, a partnership in which the partners were Mr. T.A.Z. Hussein, Mr. M. Asim and Mr. A. Hussein was registered for VAT with effect from 12th November 1985.  The partnership (as the name indicates) traded as dry cleaners.  There was never any written partnership agreement.

7.	The trade was carried on from premises at 103 Lever Street, London, E.C.1.  

8.	Mr. A. Hussein is the father of Mr. T.A.Z. Hussein.  He was originally a partner in the partnership in order to facilitate the obtaining of the partnership’s underlease of the premises.  He effectively resigned from the partnership in 1986.  He never shared in the partnership’s profits and was never a signatory on the partnership’s bank account.

9.	Mr. M. Asim is the brother-in-law of Mr. T.A.Z. Hussein.  
10.	On October 1998 something happened which (at any rate retrospectively) Mr. T.A.Z. Hussein and Mr. Asim both regarded as Mr. Asim’s leaving the partnership and the partnership being dissolved.  There is in the Tribunal’s papers a copy of a letter dated 12th February 1999 from S. Ali & Company, Solicitors, to Messrs. A. Hussein and T.A.Z. Hussein stating that that firm had been consulted by Mr. Asim (described as “your former partner”) and reciting that Mr. Asim “left the partnership on the 5th October 1998 when the same was dissolved”.  The letter went on to state inter alia that Mr. Asim “is prepared to sign any documents which are necessary to achieve the dissolution of partnership [sic] so that all the assets and liabilities of the partnership are retained by” Messrs. A. Hussein and T.A.Z. Hussein.

11.	However no document was prepared or signed.

12.	Mr. T.A.Z. Hussein subsequently in fact ran a dry cleaning business from the same premises by himself.  He adopted the trading name of Harlequin Dry Cleaners.  

13.	In the Tribunal’s papers there is a copy of a “Partnership Tax Return” submitted to the Inland Revenue for the year ended 5th April 1999 by Pressing Dry Cleaners. It shows a “date of cessation” as 30th September 1998, and declares turnover of £69,234 for the accounting period from 1st December 1997 to 30th September 1998.  The return includes the following in the box provided for “Additional information”: “Partnership dissolved on 30.9.98 due to Mr. M. Asim, partner, leaving the partnership without any consideration.  The other partner, Mr. T.A.Z. Hussein, carried on trading as a self-employed person”.

14.	During the hearing a copy of another tax return, for the year 5th April 2001, was handed up.  This return was a personal return made by Mr. T.A.Z. Hussein showing that he was self-employed, carrying on a dry cleaning business under the name of Harlequin Dry Cleaners, at 103-105 Lever Street, London, E.C.1.  This return declared turnover of £48,369 for the accounting period from 1st June 1999 to 31st May 2000.

15.	In the Tribunal’s papers there are also copies of accounts of Mr. T.A.Z. Hussein’s business, trading as Harlequin Dry Cleaners for the year ended 31st May 2000 – showing the figure given above as turnover, viz: £48,369 – and for the next year, ended 31st May 2001 – showing turnover of £47,677.

16.	There is no documentary evidence before the Tribunal indicating how, if at all, the business was carried on between 30th September (or 5th October) 1998 and 31st May 1999.

17.	As stated above, for all the periods assessed by the assessment, which start on 1st September 1999, nil VAT returns were submitted in the name of Pressing Dry Cleaners.
 
18.	The explanation for this which was given to the Tribunal was that Pressing Dry Cleaners had consistently (we assume with the Commissioners’ agreement) been making VAT returns on a cash accounting basis – that is, they accounted for output tax as and when payment for the supplies concerned was received.  This being the position, and because Pressing Dry Cleaners had a large number of debts outstanding at the time Mr. Asim left, nil VAT returns were sent in, both to indicate that no payments for supplies had been received, and also to keep the position open in case payments should be received in the future.

19.	On 13th October 1999, the premises were visited by Mr. Jaszkiwskyj, an Officer of the Commissioners, then stationed in their Debt Management Unit.  Mr. Jaszkiwskyj’s Witness Statement (which was not challenged) states that he explained the purpose of his visit to Mr. Hussein (evidently Mr. T.A.Z. Hussein), that purpose being to collect payment of outstanding VAT or secure the debt.  He states further that Mr. Hussein advised him that Pressing Dry Cleaners had ceased to trade and that he (Mr. Hussein) was trading as a sole proprietor.  In response, Mr. Jaskiwskyj states that he issued a VAT 484 Change of Particulars form to Mr. Hussein and filled in the details on his behalf.  He further states that Mr. Hussein did not wish to sign the form at the time “so I left it in his possession and advised him where to send the completed form”.

20.	The VAT 484 form referred to is with the Tribunal’s papers, it bears the Commissioners’ office date stamp for 13th October 1999 and Mr. Jaszkiwskyj’s signature.  In relation to Pressing Dry Cleaners it answers the question: “Have you ceased trading (i.e. making taxable supplies)?” by ticking the box “Yes”.  The next part of the form: “If ‘Yes’ give the date when trading ceased and the address at which you can be contacted”, is simply filled in “As Above” indicating that the address had not changed, but giving no information as to the date when trading ceased.  But the form goes on to indicate that Mr. T. Hussein is the new owner of the business, which “has been transferred”.

21.	Mr. Hussein’s evidence was that Mr. Asim’s departure had a very serious impact on the business.  He had built up the commercial clientele, ten Thistle Hotels and restaurants in the West End of London were mentioned.  On his departure, this business virtually collapsed although Mr. Asim did not take the business with him.  Mr. Hussein said that he had to start again from the beginning but he was severely impeded by the effects of a car crash.  He suffered head injuries and epilepsy.  The business developed at a much lower level than before the commercial clientele had been lost.

22.	In chronological terms, the next relevant event was the first visit of Mr. Davis, the Officer who gave evidence to the Tribunal.  This occurred on 7th August 2002 and was prompted by the receipt of nil returns on behalf of Pressing Dry Cleaners over a period of four years.  Mr. Davis said that on making the visit he knew that either tax had been underdeclared or that the business had ceased trading and should be deregistered.

23.	Mr. Davis saw Mr. T.A.Z. Hussein, who told him what he had told Mr. Jaszkiwskyj.  He said that he had not applied to deregister Pressing Dry Cleaners because he was still hoping to recover outstanding debts from commercial customers.  Mr. Davis said that this was a ridiculous situation after such a long period of time and that he should have written to apply for deregistration. 

24.	Mr. Davis required Mr. Hussein to produce his books and records to confirm that he was trading below the VAT registration limits.  This request was confirmed in a letter dated 15th August 2002.

25.	Mr. Davis was shown the accounts of Harlequin Dry Cleaners to which we have referred, and, eventually, the primary records from which they were compiled (at a meeting with Mr. Kojo on 19th November 2002). 

26.	Although Mr. Davis accepted that these accounts and records established that the trading of which they were evidence was at a level below the VAT registration threshold, he took the point that the partnership of Pressing Dry Cleaners was still in existence and had never ceased to trade.

27.	His reasoning, as expressed in his letter to Kojo & Co. dated 21st November 2002 was as follows: (1) the Commissioners had received no “notification whatsoever of a change in the business for nearly 4 years after the alleged cessation of partnership”; (2) even if there had been “a parting of the ways” between Mr. Asim and Messrs. Hussein in 1998 as recorded in the letter dated 12th February 1999 from S. Ali & Company, Solicitors, “the partnership had not at that time been fully or properly terminated”; (3) the current business bank account was still in the name of Pressing Dry Cleaners and names the partners as Mr. Asim and the Messrs Hussein.  He regarded the third reason as “the most compelling evidence that the partnership was still in existence”.

28.	He accepted that the partnership may be entitled to deregister from a current date on the grounds of reduced turnover below the deregistration limits, but refused to withdraw his assessment (which he had raised on 22nd October 2002) because he was of the view that the partnership of Pressing Dry Cleaners was still in existence, and was still trading.  He took the figures recorded for the turnover of Harlequin Dry Cleaners as the basis for the amounts assessed on Pressing Dry Cleaners.

29.	As regards the business bank account, the statement in the papers before the Tribunal (as at 25th October 2002) shows, as Mr. Davis observes, the account name as “Pressing Dry Cleaners, A.Z. Hussein Esq & T.A.Z. Hussein Esq & M. Asim Esq Trading as”, but the statement is addressed to Messrs A. and T.A.Z. Hussein only, at Harlequin Dry Cleaners, 103 Lever Street, London. EC1V 3RQ.

30.	There was produced at the hearing an exchange of correspondence between Mr. T.A.Z. Hussein and the bank, HSBC, at their Finsbury Park branch, 312 Seven Sisters Road, London. N4 2AW.  The correspondence indicates that Mr. Hussein had told the bank that the partnership of Pressing Dry Cleaners had stopped trading because Mr. Asim had left the partnership.  The bank confirmed, on 23rd July 2003, that the account name was now “Harlequin Dry Cleaners”.
31.	There was produced at the hearing, at the Tribunal’s request, sample tickets currently issued by the business when garments are taken in for cleaning.  They were produced by computer and showed the name “Harlequin Dry Cleaners” and no VAT registration number.

The contentions raised before the Tribunal

32.	As we have already indicated, the Commissioners’ case is that Pressing Dry Cleaners continues to trade and the supplies admittedly made by Harlequin Dry Cleaners are really supplies made by Pressing Dry Cleaners, and output tax is due in respect of them because Pressing Dry Cleaners has not deregistered for VAT.

33.	The Appellant’s case is that Pressing Dry Cleaners has made no taxable supplies in the periods assessed and the supplies admittedly made by Harlequin Dry Cleaners are supplies made by Mr. T.A.Z. Hussein, not Pressing Dry Cleaners, and Mr. Hussein is not liable to be registered for VAT in respect of them.

34.	The case was argued on the basis that it turned on the question of whether there was a dissolution of the Pressing Dry Cleaners partnership as the Appellant contends, or not.  

35.	The Commissioners’ reasons for submitting that there was no dissolution of the Pressing Dry Cleaners partnership are summarised above at paragraph 27.

36.	We accept the Appellant’s arguments rebutting these submissions. 

37.	First, the Commissioners received oral notification of the dissolution of the partnership at the time of Mr. Jaszkiwskyj’s visit (13th October 1999).  It is true that they received no written notification, which is a matter we must return to.

38.	Secondly, a partnership may be (as Pressing Dry Cleaners was) established without a written agreement, and such a partnership may likewise be dissolved without a written document.  The question of whether the partnership was dissolved when Mr. Asim departed must be decided by examining the true contract and intention of the parties as appears from the whole facts of the case: Cox v Hickman (1860) 8 H.L.C. 268.  The Tribunal finds on the evidence before it that the true contract and intention of the parties was that the partnership of Pressing Dry Cleaners should be dissolved on Mr. Asim’s departure, on or about 5th October 1998. 

39.	Thirdly, although we have taken into account (in reaching the conclusion given in the preceding paragraph) the fact that the current business bank account remained for a long time in the name of Pressing Dry Cleaners and named the partners as Mr. Asim and the Messrs Hussein, we do not find that fact particularly persuasive as to the continuance of the partnership.  Mr. Asim did not remain a signatory to the account.
40.	We therefore conclude that the partnership of Pressing Dry Cleaners ceased before 1st September 1999 (the date when the earliest period for which an assessment was made commenced).

41.	However, that conclusion does not decide the appeal.  We have now to apply the law in relation to liability for VAT to the facts as we have found them.

The law in relation to liability for VAT

42.	VAT on a supply of goods or services is a liability of the person making the supply (s. 1(2) VATA), and a liability arises where the supply is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him (s.4(1) VATA).  All supplies relevant to this appeal (being supplies actually made by Mr. T.A.Z. Hussein trading as Harlequin Dry Cleaners) were taxable supplies made in the course or furtherance of a business.  The relevant question is, therefore, were they made, or are they to be treated as made, by a taxable person?  

43.	A taxable person is a person who is, or is required to be, registered for VAT (s.3(1) VATA).  Section 3(2) VATA takes us to Schedule 1 (Registration in respect of taxable supplies) which is relevant to this case.

44.	Paragraph 1 of Schedule 1 VATA is concerned with liability to be registered.  On the evidence before the Tribunal, the taxable supplies made by Mr. T.A.Z. Hussein trading as Harlequin Dry Cleaners have been at a level below that required for liability for him to register to arise.  The Tribunal understood Mr. Davis to accept that (on the basis that the supplies were not taxable pursuant to the registration of Pressing Dry Cleaners).

45.	We turn therefore to the registration of Pressing Dry Cleaners.  Cesser of liability to be registered, pursuant to paragraphs 3 and 4 of Schedule 1 VATA, notification of the end of a person’s liability to VAT under paragraph 11 of Schedule 1 VATA, and entitlement to have a registration cancelled, pursuant to paragraph 13 of Schedule 1 VATA, all require notification of the Commissioners in writing (regulation 5(2) and (3), VAT Regulations 1995). No such notification in writing was made by Pressing Dry Cleaners.  The relevant form (form VAT 484) was provided to Mr. Hussein by Mr. Jaszkiwskyj but it was not submitted. There is therefore no doubt that Pressing Dry Cleaners continues to be registered for VAT – and, indeed, the contrary was not contended by the Appellant.

46.	The registration of Pressing Dry Cleaners was in the name of the firm, pursuant to section 45 VATA.  The question the Tribunal must decide is whether supplies in fact made by Mr. T.A.Z. Hussein, trading as Harlequin Dry Cleaners, are to be treated for VAT purposes on the facts of this case as supplies made by the partnership of Pressing Dry Cleaners.

47.	Section 45(2) VATA provides as follows:

“Without prejudice to section 36 of the Partnership Act 1890 (rights of persons dealing with firm against apparent members of firm), until the date on which a change in the partnership is notified to the Commissioners a person who has ceased to be a member of a partnership shall be regarded as continuing to be a partner for the purposes of this Act [VATA] and, in particular, for the purpose of any liability for VAT on the supply of goods or services by the partnership or on the acquisition of goods by the partnership from another member State.”

48.	The main effect of this provision is to preserve liability vis-à-vis the Commissioners of a former member of a partnership until notification of his ceasing to be a partner is made to the Commissioners.  That does not directly address the issue in this case because Mr. Asim’s liability to the Commissioners is not in issue.

49.	However section 45(2) VATA expressly saves the effect of section 36 of the Partnership Act 1890 (“PA 1890”).  Section 36(1) PA 1890 provides as follows:

“Where a person deals with a firm after a change in its constitution he is entitled to treat all apparent members of the old firm as still being members of the firm until he has notice of the change.”

50.	The Commissioners must be taken for the purposes of section 36(1) PA 1890 as being “a person [dealing] with” the firm.  A change in the constitution of a partnership includes its dissolution without any two or more of the previous partners continuing in (a new) partnership.  But section 36(1) PA 1890 does not require notice of the change in the constitution of a partnership to take any particular form.

51.	It follows in the Tribunal’s judgment that the Commissioners are entitled to treat Mr. T.A.Z. Hussein trading as Harlequin Dry Cleaners as still being a member of Pressing Dry Cleaners and trading as such until they had notice of the change.  However, they had oral notice of the change (as Mr. Palmart accepted in argument) on 13th October 1999, when Mr. Jaszkiwskyj visited.  From that date they were not entitled, pursuant to section 36(1) PA 1890, to treat Mr. T.A.Z. Hussein, in fact trading on his own account as Harlequin Dry Cleaners, as still being a member of the firm of Pressing Dry Cleaners.

52.	There is one further matter we must consider before reaching our decision.  It was suggested (by both sides) that Pressing Dry Cleaners transferred its business as a going concern to Mr. T.A.Z. Hussein. The Tribunal is not satisfied that this has been proved.  In particular, we are unclear as to how, if at all, the business was carried on between 30th September (or 5th October) 1998 and 31st May 1999 – see: paragraph 16 above.  But even if the business was transferred as a going concern the Tribunal knows of no (and was not shown any) statutory provision to the effect that in such a case the transferee is liable to VAT by virtue of an assessment on the transferor.

53.	Mr. Palmart, in his letter to the Tribunal after the conclusion of the hearing, drew the Tribunal’s attention to section 49(1)(a) VATA, which provides as follows:

“Where a business carried on by a taxable person is transferred to another person as a going concern, then–

(a) for the purpose of determining whether the transferee is liable to be registered under this Act he shall be treated as having carried on the business before as well as after the transfer and supplies by the transferor shall be treated accordingly;”

54.	Mr. Palmart did not in his letter go on to say what he submitted that the effect of this provision was in this case, but presumably it affects the conditions under which Mr. T.A.Z. Hussein trading as Harlequin Dry Cleaners was liable to be registered if he is to be taken to have been the transferee of a business as a going concern – see in particular paragraphs 1(1)(a) and 1(2)(a) of Schedule 1, VATA.

55.	We set out paragraphs 1 to 3 of Schedule 1 VATA so far as relevant:

“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 £54,000; 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 £54,000.

(2) Where 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 £54,000; or

(b) there are reasonable grounds for believing that the value of his taxable supplies in the period of 30 days beginning at the time of the transfer will exceed £54,000.

(3) A person does not become liable to be registered by virtue of sub-paragraph (1)(a) or (2)(a) if the Commissioners are satisfied that the value of his taxable supplies in the period of one year beginning at the time which, apart from this sub-paragraph, he would become liable to be registered, will not exceed £52,000.”

56. 	The effect of these provisions when read with section 49(1) VATA, as it seems to the Tribunal, is that if there was a transfer of a business as a going concern by Pressing Dry Cleaners to Mr. T.A.Z. Hussein (as to which we are not satisfied on the evidence) then Mr. T.A.Z. Hussein was – at least prima facie – liable to be registered for VAT by virtue of paragraph 1(2)(a) of Schedule 1, because he is (by section 49(1) VATA) to be treated as having made the supplies actually made by Pressing Dry Cleaners in the period of one year ending at the time of the transfer, which exceeded £54,000.  Paragraph 1(3) of Schedule 1 VATA does not avoid this conclusion because for that paragraph to take effect the Commissioners require to be satisfied that Mr. Hussein’s supplies in the period of one year beginning at the time of the transfer would not exceed £52,000.  Although that was actually the case, the Commissioners did not consider the matter and therefore could not have been satisfied in relation to it.  The Tribunal however observes that if the Commissioners had been notified of the position, the evidence shows that they ought to have been satisfied that Mr. Hussein’s supplies in that period would not have exceeded £52,000.
 
57.	Nevertheless these considerations do not advance matters for the purposes of this appeal, because even if it were the case that Mr. T.A.Z. Hussein trading as Harlequin Dry Cleaners was liable to be registered for VAT following a transfer of the business to him as a going concern by Pressing Dry Cleaners, he and not Pressing Dry Cleaners would have to have been assessed in order that any underdeclared tax should be recovered from him.  As Mr. Kojo pointed out in his letter to the Tribunal in response to Mr. Palmart’s letter, the appeal is against assessments raised on Pressing Dry Cleaners, not Mr. T.A.Z. Hussein trading as Harlequin Dry Cleaners.  There is nothing in section 45 VATA which treats an assessment made on a partnership as effectively made on a person who has ceased to be a member of the partnership, in a case where the assessment relates to or to any matter arising in a prescribed accounting period after that person has ceased to be a member of the partnership.

Conclusion

58. 	The Tribunal’s conclusion therefore is that the Commissioners were entitled to treat Mr. T.A.Z. Hussein trading as Harlequin Dry Cleaners as still being a member of Pressing Dry Cleaners and trading as such until they had notice of the change in the constitution and ownership of the business.  They had oral notice of the change on 13th October 1999, when Mr. Jaszkiwskyj visited.  From that date they were not entitled, pursuant to section 36(1) PA 1890 or otherwise, to treat Mr. T.A.Z. Hussein, in fact trading on his own account as Harlequin Dry Cleaners, as still being a member of the firm of Pressing Dry Cleaners.  The appeal will therefore be allowed to the extent that it relates to periods after 13th October 1999.  It appears from the details supporting the assessment that the amount of the assessment should be reduced from £21,491 to £870, with a corresponding reduction in the interest charged.  That is the decision of the Tribunal.  The parties have liberty to apply to a Chairman sitting alone in relation to the amount of the reduction and in relation to costs.

JOHN WALTERS QC
CHAIRMAN

RELEASED:

LON/02/1079