Mark Edward Loftus v Customs & Excise [2003] UKVAT V18435 (08 December 2003)

	VALUE ADDED TAX — liability to register — date from which registration required — VATA 1994, Sch 1, paras 1(1)(a), 5(2) — whether appellant exempted — Sch 1, para 1(3) — whether registration should be cancelled — Sch 1, paras 13(3), 18 — late notification — whether penalty properly imposed — mitigation

MANCHESTER TRIBUNAL CENTRE

MARK EDWARD LOFTUS	
Appellant
	
- and -

THE COMMISSIONERS OF CUSTOMS AND EXCISE
Respondents

				Tribunal:	Colin Bishopp (Chairman)
						Carol Roberts	
	
Sitting in public in Manchester on 21 October 2003 
David Simon, FCCA, for the appellant 
David Gilchrist of counsel, instructed by their solicitor’s office, for the respondents

© CROWN COPYRIGHT 2003

DECISION
1	The appellant, Mark Edward Loftus, repairs and services motor vehicles from premises in a suburb of Manchester. His business is fairly modest in scale: he is a sole trader and has no employees. As one might expect, he does not have a sophisticated accounting system, but he has always kept records of his sales and purchases—the respondents do not contend they were in any way inaccurate—which he has handed, once a year, to his accountants in order that they might prepare his accounts for production to the Inland Revenue. Unfortunately for Mr Loftus, it was his habit to hand his records to his accountants twelve months or a little more after the end of each accounting year; his year ended on 30 June.
2	In about October 2000 the accountants prepared Mr Loftus’ accounts for the year ended 30 June 1999. They observed that his turnover for that year was close to, though still below, the VAT registration threshold as it then was, £51,000. They decided to review Mr Loftus’ turnover, month by month, for the following year and in doing so discovered that he had crossed the threshold, still £51,000, in November 1999. He was, in consequence, required to register for VAT with effect from 1 January 2000: see the Value Added Tax Act 1994, Schedule 1, paragraphs 1(1)(a) and 5(2). But because of Mr Loftus’ practice of handing his records to his accountants several months in arrear, the discovery that he should have registered for VAT was not made until the late autumn of 2000. He made an application for registration promptly after his liability to register had been discovered, but he was by then unable to comply with paragraph 5(1) of Schedule 1, which requires a trader to notify the Commissioners of his liability to register within 30 days of the end of the month in which he becomes liable to do so; in this case Mr Loftus should have notified the Commissioners of his liability by 31 December 1999.
3	The Commissioners duly registered Mr Loftus for VAT, and then proceeded to calculate the amount of tax for which he should have accounted during the period between 1 January 2000, from which date he should have registered, and 28 December 2000, the day before the date on which his application for registration was received. They concluded that Mr Loftus owed tax of £4,365 (after allowing for the input tax for which he could claim credit) and issued an assessment for that amount; the arithmetic of that calculation is not challenged. They also imposed a penalty of £436, being ten per cent of the tax, for Mr Loftus’ late notification of his liability to register: see section 67 of the 1994 Act.
4	None of the foregoing was disputed, and we heard no evidence on either side. The argument advanced for the appellant by David Simon, who has become his accountant since the events which we have related, was that the threshold had been exceeded in November 1999 only because of a short-lived surge in turnover. The level of the appellant’s sales had subsided soon after, and the respondents had failed to take account of that fact and to apply paragraph 1(3) of Schedule 1. That sub-paragraph reads:
“A person does not become liable to be registered by virtue of sub-paragraph (1)(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 become registered will not exceed [the prevailing de-registration threshold].”
5	The prevailing de-registration threshold at that time was £49,000.
6	In the latter part of 1999, Mr Simon explained, the appellant had a contract to undertake work for a company which had a fleet of cars. That work, and the income it generated, was the main reason why his turnover rose above the registration threshold. However, the contract did not last, because the company disposed of its fleet, and the appellant’s turnover fell below the threshold. Mr Simon produced documentation which went some way towards justifying his contention, though it appeared to us that, at best, the appellant’s turnover from this work constituted not much more than ten per cent of his turnover. On the other hand, we accept that the assessment itself lends support to Mr Simon’s argument since the output tax included within it, £6,020, is the VAT fraction of a total sales value of a little over £40,000—well within the de-registration threshold—for a few days short of a whole year.
7	Mr Simon contended that, had he understood the rules properly, the appellant would have sought in December 2000 to take advantage of paragraph 1(3), and would have been able without difficulty to satisfy the Commissioners that his turnover in the twelve months following November 1999 was likely to be less than £49,000, as indeed it was. He should not be put at a disadvantage because he did not understand the intricacies of the rules nor (he hinted) because his former advisers had not handled his affairs as well as they might; and it was, he said, unfair and unreasonable that the Commissioners refused to take account of what subsequent events demonstrated was the appellant’s true position. They should have accepted that, although the registration threshold was exceeded temporarily in November 1999, sub-paragraph 1(3) excused the appellant from registration, and the assessment and the penalty should be discharged.
8	Alternatively, he argued, the Commissioners should apply the provisions of paragraph 13(3) of Schedule 1. That sub-paragraph is as follows:
“(3)	Where the Commissioners are satisfied that on the day on which a registered person was registered he was not registrable, they may cancel his registration with effect from that day.”
9	Had the Commissioners examined the appellant’s turnover on 29 December 2000, when his application for registration was received, they would have been able to determine that his turnover in the preceding twelve months of £47,583 was below the registration threshold (by then £52,000) and was unlikely to exceed that threshold in the following twelve months. Thus, Mr Simon argued, on 29 December 2000 he was not registrable, and his registration should be cancelled with the consequence that the assessment and the penalty should be discharged.
10	For the respondents, David Gilchrist of counsel argued that wording of paragraph 1(3) of Schedule 1 made it clear that its applicability must be considered at the time at which the trader becomes registrable and that the use of the words “will not exceed” necessarily implied a prospective approach. When he submitted his application to register, Mr Loftus himself predicted that his turnover in the following twelve months would be £55,000, by so answering the relevant question on the form. That prediction ought, properly, to have been made in respect of the twelve months after 1 January 2000, the effective date of registration, but even if one assumed that it was made in respect of the twelve months after 29 December 2000, when the form was received, the consequence was the same—the appellant was liable to be registered. It was his own prediction and the Commissioners could not be criticised for acting on it. It may well be that the prediction turned out to be over-optimistic, but paragraph 1(3) did not allow for retrospective re-assessment of the appellant’s position.
11	Once it became apparent that his turnover had not attained the predicted levels, and was not likely to do so in the foreseeable future, the appellant could apply to have his registration cancelled (as he had done) but the cancellation could not be backdated (see paragraph 13(1) of Schedule 1). Sub-paragraph 13(3) could not assist him since he had to show, in order to take advantage of that provision, that he was not registrable; and paragraph 18 of the Schedule provided that “registrable” meant “liable or entitled to be registered under this Schedule”. Even if Mr Loftus was not required to be registered, he was entitled so to be since he made taxable supplies, and had asked to be registered: see paragraph 9 of the Schedule.
12	In our view Mr Gilchrist’s arguments are entirely correct. We have some sympathy with the appellant, but the fact remains that he did exceed the threshold, as is conceded on his behalf, in November 1999, and became liable to register. Had he, or his then accountants, monitored his turnover during 2000 carefully, he or they would have realised, by the time Mr Loftus actually applied for registration, that his turnover had fallen below the threshold, as Mr Simon told us, and an application under paragraph 1(3), even though it would by then have been retrospective, might well have succeeded. As it is, not only was no such application made, the information provided by Mr Loftus to the Commissioners at the time was such that if any application had been made it would be bound to fail. Mr Gilchrist’s contention in respect of sub-paragraph 13(3) seems to us unanswerable; the condition on which the power conferred by that provision is exercisable cannot be satisfied.
13	The appeal against the fact of the registration and the assessment to tax must therefore fail. Since Mr Loftus’ application for registration was indisputably late it follows that in principle the appeal against the penalty must also fail, but it is open to us to consider whether there should be any mitigation—the Commissioners have allowed none. The power to mitigate a penalty imposed under section 67 of the Act is granted by section 70. We may reduce the penalty to such amount, including nil, as we think fit, but we must leave out of account three factors—that the appellant’s conduct was due to an insufficiency of funds, that there has been no significant loss of VAT, and that the appellant has acted in good faith. In our view it is relevant that, albeit late, the appellant applied for registration when told by his accountants that he should do so (this is not a case in which the Commissioners have registered him compulsorily following an investigation) and that he will be unable to recover the VAT for which he has been required to account from his customers. That fact represents a penalty in itself. On the other hand, it is plain that Mr Loftus failed to take adequate steps to monitor his turnover; had he done so he would have realised much sooner, and quite possibly at the time it occurred, that he had crossed the threshold and must register. That failure cannot be entirely excused. We have concluded that the penalty should be mitigated by one half, to £218.
14	To that very limited extent, the appeal is allowed, but in all other respects it is dismissed. We make no direction in respect of costs.

COLIN BISHOPP
CHAIRMAN
Release Date: 

MAN/03/0397