20663

VAT REGISTRATION – Original dispute liability for registration based on value of taxable supplies – Respondents change grounds for liability to transfer of going concern – Appellant no notice of change – decline to entertain new ground in the overall interests of fairness of proceedings – allow appeal because Respondents effectively withdraw disputed decision – no findings of fact made – Respondents may be entitled to start again with new decision

LONDON TRIBUNAL CENTRE

	MICHAEL J MORRIS  	Appellant
t/a MJM Hairstyles
	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      CAROLINE DE ALBUQUERQUE (Member) 
			                   RUTH WATTS DAVIES MHCIMA FCIPD  (Member)

Sitting in public in London on 12 February and 9 April 2008

The Appellant appeared in person

Jonathan Holl of the Solicitor’s Office for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION
The Appeal
1.	The Appellant was appealing against the Respondents’ decision on review dated 28 October 2005 compulsorily registering him for VAT with effect from 1 March 2000, and a late registration penalty in the sum of £4,296.
2.	The Appellant had worked as a hairdresser for 48 years. The Appeal concerned his business “MJM Hairstyles” which had been trading from premises in Borehamwood, Hertfordshire since 15 November 1998. Prior to that date the Appellant had been a director of Adam Adair Limited which was also a hairdressing business registered for VAT operating from the same premises in Borehamwood. An accountant advised the Appellant to use a different business model involving the engagement of self-employed hair stylists to bring him below the registration threshold for VAT. The Appellant followed the advice which resulted in the winding up and de-registration of Adam Adair Limited  and restarting the business as a sole trader under the name of “MJM Hairstyles” 
3.	The original dispute was about whether the Appellant had exceeded the registration threshold, and, therefore, liable to be registered for VAT.  However, at the adjourned hearing the Respondents put forward a new ground for registration, namely, the closure of Adam Adair Limited and the re-opening of the business under “MJM Hairstyles” constituted a transfer of a going concern. Thus the Appellant was liable to be registered from the date of transfer, 15 November 1998. The validity of the late registration penalty depended upon whether the Appellant was liable to be registered for VAT.
The Evidence
4.	We heard evidence from the Appellant and Mrs Janet Commock for the Respondents. Mrs Commock was the officer who carried out the review of the original decision requiring the Appellant to be registered for VAT. The parties supplied a bundle of documents.
5.	The first hearing was adjourned part-heard at the request of the Respondents to enable Mrs Commock to examine the Appellant’s  weekly cash book, wages book and self-employed stylists’ book for 2002/03, and report her findings at the hearing on 9 April 2008.
History of the Dispute
6.	Following a registration enquiry the Respondents notified the Appellant by letter dated 10 November 2003 that he was compulsorily registered for VAT from 1 October 2001. On 2 February 2005 the Respondents imposed a late registration penalty in the sum of £2,383 under section 67(1) of the VAT Act 1994.
7.	After receiving representations from the Appellant’s accountant the Respondents conducted a review of their decision to compulsorily register the Appellant from 1 October 2001. On 28 October 2005 the Respondents informed the Appellant that having examined the Appellant’s financial statements and self assessment income tax returns they now considered the effective date of registration to be the 1 March 2000 not 1 October 2001. On 2 November 2005 the Respondents notified the Appellant that his registration particulars were to be amended with the new registration date of 1 March 2000 and that the late registration penalty would be recalculated. On 6 January 2006 the Respondents served the Appellant with notice of a penalty in the sum of £4,296.
8.	On 9 November 2005 the Appellant lodged a Notice of Appeal against the Respondents’ decision dated 2 November 2005 to compulsorily register him for VAT. The grounds of Appeal were that the VAT threshold had not been breached.
9.	At the hearing on 9 April 2008 Mrs Commock reported on her findings following the examination of the Appellant’s weekly account records. She concluded that the effective date of registration based upon turnover was the 1 November 1999. The Respondents’ advocate, however, submitted that the Appellant’s business was a transfer of a going concern which occurred on the 15 November 1998.  Thus the Appellant was liable to be registered from the 15 November 1998 by virtue of paragraph 1(2) of schedule 1 of the VAT Act 1994.  In those circumstances the Respondents requested the Tribunal to find that the Appellant’s business was a transfer of going concern and that his liability for registration took effect from 15 November 1998.
The  Appellant’s Business
10.	 The Appellant was open for business six days a week between 9.00am and 6.00pm, closing 3.30pm on a Saturday. The Appellant supplied hairdressing services to men and women. The Appellant was present on the premises on four days of the week. He employed two members of staff and engaged freelance hair stylists. 
11.	The Appellant’s arrangement with the freelance hair stylists was that he would provide them with the facilities, equipment and materials to cut and style hair in return for 60 per cent of their weekly takings which would reduce to 50 per cent if their earnings exceeded £400. The stylists were required to record each of their sales on a docket, details of which were then transcribed by the Appellant onto a ledger and totalled at the end of each week in order to determine the 60/40 split. The freelance hair stylists were responsible for their own tax and national insurance and held  their own liability insurance.
12.	The Appellant’s business operated in a run down High Street and his takings had suffered from frequent road works. The hairdressing salon was old and in need of a refit. There was two years to run on the lease. The Appellant was near retirement age. 
The Appellant’s Turnover
13.	The Respondents used the Appellant’s sales figures declared in his restated profit and loss accounts for years ending 31 March 2000, through to 31 March 2003 submitted on 22 September 2003 to arrive at the Appellant’s effective date of registration.  The Appellant submitted two sets of accounts for each year, the first set included the total receipts of the freelance hair stylists, the second set excluded the earnings of the self employed hair stylists ( their 40 per cent share).
14.	The disputed decision of 2 November 2005 was based upon by the gross takings of the Appellant’s business which included the total receipts of the freelance hair stylists. Mrs Commock applying best judgment concluded that the VAT registration threshold was breached in January 2000, which resulted in an effective date of registration of 1 March 2000.
15.	Following the adjournment of the hearing on 12 February 2008, Mrs Commock examined the weekly accounts books of the Appellant for the year ending March 2003. She was unable to reconcile the figures in the weekly accounts books with the gross takings recorded in the Appellant’s restated profit and loss accounts for the year ending March 2003. In those circumstances Mrs Commock returned to the restated profit and loss accounts and arrived at an effective date of registration of 1 November 1999 for both sets of accounts, inclusive and exclusive of the earnings of the freelance hair stylists.
16.	 It transpired at the adjourned hearing on 9 April 2008 that Mrs Commock had misunderstood the method by which the Appellant calculated his weekly takings from the information contained in his cash book. We calculated his takings for October 2002 from the information in the Appellant’s cash book and arrived at a figure of £5,231.02 excluding the takings of the freelance hair stylists, which transposed to an annual turnover of £68,003.26, significantly above the 2002/03 registration threshold of £53,000.
Reasons for Our Decision
17.	 The Appellant explained that he had limited resources and relied entirely on the advice of his accountant about his liability for VAT. The Appellant indicated that he may be forced to close his business if he was required to pay the outstanding VAT. Further he had fully co-operated with the Respondents’ enquiries into his business affairs. The matters raised by the Appellant were not relevant to the disputed issue about whether he should be registered for VAT. The Respondents, however, conceded that they constituted mitigation for the late registration penalty which they would reduce by 75 per cent.
18.	The landscape of this Appeal, however, changed at the adjourned hearing when the  Respondents switched the rationale for their case from a registration based on the value of the taxable supplies to one derived from the occurrence of a transfer of a going concern. The Appellant received no prior notification of the switch. The Respondents made no application to amend their statement of case to incorporate the new rationale.
19.	The Respondents submitted that we had jurisdiction to decide the Appeal on the new rationale. In their view the issue of the transfer of going concern emerged from the evidence, and that in effect we were deciding on a factual matter rather than on a new point of law. We disagree with the Respondents’ submission.
20.	 Registration by virtue of being a transfer of a going concern is dealt with in the legislation as a separate and distinct ground from a registration based on the value of taxable supplies. Paragraphs 1(1) and 1(2), schedule 1 of the VAT Act 1994 are the respective provisions for determining liability for registration based on taxable supplies and on a going concern.  The legal issues associated with a transfer of a going concern are different and more complex than determining liability for registration on the value of taxable supplies which is essentially a computational exercise.  With the introduction of the new rationale we were not just making a proper interpretation of the facts as suggested by the Respondents but considering a new set of legal principles which had not been contemplated in the Respondents’ statement of case.
21.	 We were not in a position to make findings of fact on whether the Appellant’s business, “MJM Hairstyles”, was a transfer of going concern. The Appellant was unaware that the Respondents were raising this matter at the adjourned hearing. He  did not know beforehand  the facts relied upon them to establish a transfer of going concern and was unprepared to meet the new grounds. We made certain enquiries of the Appellant about the circumstances following the closure of Adam Adair Limited. However, we considered that such lines of enquiry were going beyond a proper use of our inquisitorial jurisdiction, particularly as we were dealing with an unrepresented Appellant who in all probability did not understand the concept of a transfer of a going concern. Also the consequences of finding a transfer of going concern would produce a more adverse result for the Appellant than making a liability determination on the value of taxable supplies.
22.	   We concluded that we did not have jurisdiction to make a determination on the new rationale of a transfer of a going concern. Under section 83(a) of the VAT Act 1994 an appeal shall lie to the Tribunal with respect to the registration of any person under the Act.  Paragraph 9, schedule 12 of the 1994 Act empowers the Lord Chancellor to make rules of procedure governing the procedure to be followed on appeal which are found in the Value Added Tax Tribunal Rules 1986.  Under rule 3 of the 1986 Rules a copy of the Respondents’ disputed decision shall be attached to the Notice of Appeal. Rule 2 defines a disputed decision as the decision of the Commissioners against which an appellant appeals to a tribunal. Under rule 8 the Respondents are required to serve a statement of case upon the Tribunal within 30 days of the disputed decision setting out the matters and facts on which they rely to support the disputed decision. Thus the tribunal exists to adjudicate on a dispute following a ruling or determination by the Respondents. In order for the tribunal to have jurisdiction there must be an issue between the parties which has been sufficiently crystallised to constitute a decision falling within one of the paragraphs of section 83 of the VAT Act 1994, which is referred to in the rules as a disputed decision.
23.	   The disputed decision in this Appeal was the Respondents’ decision dated 2 November 2005 amending the Appellant’s date of effective registration to 1 March 2000 which was based on Mrs Commock’s investigation of the Appellant’s financial statements and revised self assessment returns. The disputed decision was about whether the Appellant had exceeded the VAT registration threshold in respect of his taxable supplies. The Appellant’s grounds of Appeal and the Respondents’ statement of case confirmed the nature of the dispute between the parties. The effect of the Respondents’ introduction of transfer of going concern as the rationale for the Appellant’s liability for registration was to alter fundamentally the nature of the dispute between the parties which replaced the disputed decision dated 2 November 2005.  The Respondents did not apply to amend their statement of case. In those circumstances we consider that the Respondents have effectively withdrawn the disputed decision dated 2 November 2005, and acknowledged that their reasoning for the decision was no longer applicable. 
24.	We consider that the appropriate orders to make in this Appeal, is to allow the Appellant’s appeal against the original disputed decision dated 2 November 2005 on the ground that the Respondents acknowledge that their reasoning was no longer applicable. Further we decline to entertain the Respondents’ submission of liability based on a transfer of a going concern in the overall interests of the fairness of the proceedings, particularly as the Appellant had no prior notice of the new ground and not in a position to answer it. 
25.	In reaching our decision in this Appeal we make no criticism of the Respondents’ conduct of this Appeal. We consider the Respondents’ request for an adjournment of the first hearing was responsible and motivated from a desire to present an accurate position to the Tribunal. We have made no findings of fact on whether the Appellant is liable to registered for VAT. It would appear, therefore, that the Respondents are entitled to make a fresh decision on the Appellant’s liability for registration, following which the Appellant can either accept the decision or make an appeal to the Tribunal.
Decision
26.	For the reasons given above we make the following orders:
(1)	The appeal is allowed on the ground that the Respondents have effectively withdrawn their disputed decision dated 2 November 2005.
(2)	We decline to entertain the Respondents’ submission of liability based on a transfer of a going concern in the overall interests of the fairness of the proceedings.
27.	We make no order for costs.

 

MICHAEL TILDESLEY OBE
CHAIRMAN
RELEASE DATE: 30 April 2008
LON 2005/1162