20691

VAT – Appeal against penalty for late registration – Appellant a hairdresser operating a “rent a chair” arrangement – late registration because the Appellant considered his supplies to independent stylists working at his salon were exempt supplies of land – held by the High Court, reversing an earlier Tribunal, that they were not – whether the Appellant had a reasonable excuse for the late registration – held he had and, if that was wrong, that the penalty was disproportionate and ought to be reduced to nil in exercise of the Tribunal’s power to mitigate in s.70 VATA – Appeal allowed

LONDON TRIBUNAL CENTRE

	CHRISTOPHER DENYER	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S 
	REVENUE AND CUSTOMS	Respondents

			Tribunal:	JOHN WALTERS QC (Chairman)
					MRS CATHERINE FARQUHARSON ACA

Sitting in public in London on 31 January 2008

Andrew Young, Counsel, instructed by Rawlence & Browne, Chartered Accountants, for the Appellant

Jonathan Holl, Advocate, HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2008

DECISION

1.	Christopher Denyer (the Appellant) appeals against the imposition of a penalty of £6,041 under s. 67(1) Value Added Tax Act 1994 (VATA). The penalty is imposed by reason of the late notification by the Appellant of his liability to be registered for VAT (a failure to comply with paragraph 5 or 6 of Schedule 1 VATA - see: s.67(1)(a) VATA).  The period beginning with the date on which the Appellant was required to be registered, and ending with the date on which the Commissioners received notification of, or otherwise became fully aware of, his liability to be registered (cf. s.67(3)(a) VATA) appears to have slightly less than 10 years, from 1 September 1997 to 16 February 2006, which is the end default date given by the notice of assessment to the penalty.  A default period of this length would normally give rise to a penalty of 30% of the relevant VAT, but, in this case, the rate has been mitigated by the Commissioners to 15%.  
2.	The Appellant’s appeal is on the grounds that he had a reasonable excuse for the late notification of his liability to be registered for VAT (see: s.67(8) VATA). We bear in mind the provisions of s.71(1) VATA, which limit the factors which the Tribunal may take into account in finding a reasonable excuse in any case.  The Commissioners rely on s.71(1)(b): we may not take into account as showing a reasonable excuse the fact of reliance placed on any other person to perform a task, nor any dilatoriness or inaccuracy on the part of the person relied upon. 
3.	The Appellant is a hair stylist with a hairdressing salon in Salisbury.  The Commissioners assessed the Appellant because they were of the view that the Appellant’s system of “renting a chair” to other hair stylists was ineffective to classify the supply made by the Appellant to the other independent hairdressers working at the salon as an exempt supply of immovable property.  The Appellant appealed to this Tribunal (Chairman: the late Michael Johnson) on this point of principal.  The Tribunal decided the point in the Appellant’s favour.  The Commissioners appealed and Briggs J. allowed their appeal, holding that “in all chair letting hairdressers’ arrangements including the present, the supply cannot properly be characterised as the letting of immovable property” (Judgment, paragraph [44]). The Commissioners have therefore successfully established that the Appellant has been making taxable, and not exempt, supplies for VAT purposes, hence the liability to be registered, the liability for VAT due on that basis, and the late notification penalty.
4.	Briggs J. remitted the appeal against the late notification penalty to this Tribunal for reconsideration in the light of his judgment (ibid. [48]) – hence this appeal.
5.	Thus we have to decide whether the circumstances in which the Appellant appealed the Commissioners’ decision that his system of renting a chair” to other hair stylists did not cause his supplies to other hair stylists to be properly characterised as exempt disclosed a reasonable excuse for the late notification of his liability to VAT which arose from the Commissioners’ decision being (as Briggs J found) correct.
6.	We heard oral evidence from the Appellant. On the basis of this, and the documentary evidence, we find the following facts.
7.	The Appellant has run his current business (operating “rent a chair” arrangements to independent stylists) for 15 years.  Before that he himself was an independent stylist and when he started running his own salon he continued arrangements with other independent stylists which he had been used to as an independent stylist working in another salon.
8.	In about 1992, when he started his current business he applied for a VAT registration number and rendered VAT returns.  This was done on the advice of his accountant at the time.
9.	About a year later, in about 1993, he ceased to be registered, having received advice from his accountant that the National Federation of Hairdressers had advised that he need not be registered for VAT.  His accountant had been told by a Customs officer (unnamed) at that time that it was, in the Appellant’s words, “a bit of a grey area”, but the accountant had been advised by the officer that as long as the Appellant conformed to the agreement between the National Federation of Hairdressers and the Commissioners regarding “rent a chair” agreements, arrangements indicated in that agreement as constituting exempt supplies would be so treated. 
10.	He was informed of this by his accountant and deregistered for VAT accordingly.  After deregistration he telephoned the VAT helpline for confirmation of the advice received.
11.	He informed Customs (via the helpline) how he was running his business and the advice he received was that his arrangements qualified for exemption. 
12.	He stated (and we accept) that he had not knowingly evaded VAT, that the Commissioners had never suggested that he was negligent in the matter, that he did not charge VAT during the period of deregistration, that he cannot charge VAT retrospectively to his customers, and that after he registered again, and began accounting for VAT, he did not put up his prices.
13.	Under cross-examination by Mr. Holl, the Appellant admitted that he did not ask for (or think of asking for) the VAT helpline’s advice in writing, and that his arrangements had not in fact conformed to the agreement between the National Federation of Hairdressers and the Commissioners in that there had been no written agreements between himself and the independent stylists.
14.	The point about there having been no agreements in writing between the Appellant and any of the stylists came up in the earlier appeal.  Mr. Johnson in his Decision commented that on that occasion the Appellant had said in evidence that he was aware that the agreement between the National Federation of Hairdressers and the Commissioners recommended written agreements, but that he had taken the advice of a citizens’ advice bureau, and had been told that a verbal agreement would be preferable (Tribunal Decision, paragraph [23]).  
15.	Mr. Johnson went on to comment (ibid. [24): “We can see some sense in that.  If a written agreement is entered into, and it is then found that the parties have in practice varied what they have agreed at the outset by their conduct from time to time, either by disregarding agreed terms or by acting differently from what has been agreed, then the written document has limited value.  Ultimately it is how the parties have in practice conducted themselves, rather than what they may have written at the onset of their relationship, that reflects the true relationship.”
16.	In evidence before us, the Appellant stated that a person at a small claims court had advised him that written agreements were not worth having. 
17.	In his submissions on behalf of the Appellant, Mr. Young contended that the technical VAT issues surrounding the liability of the Appellant’s supplies to stylists under his “rent a chair” arrangements were complex, and that Customs’ submissions (although reasonable) had not all been accepted by Briggs J, and that, as has become clear following Briggs J’s judgment both the Tribunal and, of course, the Appellant himself have made errors of VAT analysis.  In all the circumstances the Appellant’s decision to deregister and to continue trading on the basis that the supplies he made to stylists were exempt was reasonable, and afforded a reasonable excuse for his late notification of liability to register.
18.	Briggs J had held that “the package identified in the present case lies at the minimalist end of the spectrum, so far as concerns the provision of shared facilities” (Judgment [42]).  That is, the judge had accepted that the Appellant provided little to the stylists in terms of shared facilities which would render the provision of the chair (arguably a licence of immoveable property) not the dominant element of the supply made by the Appellant to stylists.  Although this did not avail the Appellant on the question of the correct characterisation of the supplies made, Mr. Young’s point was that the circumstances of this case were not such as to make the Appellant’s contention that his supplies were exempt obviously (or at all) unreasonable.
19.	Mr. Young also pointed to Mr. Johnson’s acceptance of the Appellant’s evidence as having been truthful (Decision [27]).  He submitted that we should not doubt that the Appellant thought he had satisfied that conditions of the agreement between the National Federation of Hairdressers and the Commissioners, even though he had no written agreements with the stylists.
20.	He submitted that the Appellant had a reasonable excuse for the late notification and the penalty should be discharged, alternatively that we should hold the penalty was excessive and further mitigate it.  (We have - under s.70(1) VATA, having regard to the parameters laid down ins.70(4) - power to reduce a penalty assessed under s.67 VATA to such amount (including nil) as we think proper.)
21.	Mr. Holl, for the Commissioners, accepted that there is no reason to believe that the Appellant knowingly evaded VAT, and that there was no evidence of negligence.  He also accepted that the Appellant cannot now retrospectively charge VAT to his customers, and will not do so.
22.	However he submitted that the Appellant had not discharged the burden of proof upon him to show a reasonable excuse.
23.	His grounds for this submission were that it is incumbent upon a trader who seeks advice from the VAT helpline to get his advice from the helpline in writing, so as to avoid any possibility of misunderstanding as to what the advice was.  Mr. Holl stated that if the Commissioners were satisfied that they had (via the helpline) given wrong advice on full disclosure having been made, they would have accepted that there had been a misdirection and would not have pursued the penalty.
24.	There was however doubt that the Appellant had, in telephoning the helpline, addressed specifically the liability attaching to the provision of services to the stylists, although Mr. Holl accepted that the Appellant had done “everything in good faith”.
25.	Mr. Holl submitted that the facts showed that the Appellant had placed reliance on his accountant to work out that his turnover figures were such (having regard to his original view of the effect of the “rent a chair” arrangements) that he did need to deregister.  He said that this was a fact within s.71(b) VATA which could not afford a reasonable excuse.
26.	We announced at the conclusion of the hearing of the appeal that we would allow the appeal for the following reasons:
27.	First, we hold that the Appellant has shown that he had a reasonable excuse for the late registration. This was for the following four reasons: (1) the Appellant honestly held the reasonable view that his arrangements satisfied the conditions for the application of the agreement between the National Federation of Hairdressers and the Commissioners; (2) the Appellant honestly and reasonably relied on the advice of his accountant that he was not liable to register for VAT; (3) the Appellant honestly and reasonably relied on the advice of the VAT helpline to the same effect; and (4) the complexity of the application of the technical VAT law in the circumstances of this case were such that the Appellant’s view, honestly held, was a reasonable one.
28.	We hold that the Appellant’s reliance on the advice of his accountant (and the advice of the VAT helpline) do not engage s.71(1)(b) VATA.
29.	Secondly, even if we had thought that the Appellant had not shown a reasonable excuse (or if we were wrong in law to have reached the conclusion that he had), we would have held that the penalty ought to be mitigated to nil, pursuant to our power under s.70 VATA.  Our reasons for this would have been that in our judgment any penalty would be disproportionate to the late declaration having regard: (1) to the factors which have satisfied us that the Appellant has a reasonable excuse, and (2) to the fact that the Appellant remains liable for a substantial amount of VAT relative to the period when he was not registered and he has  no prospect of recovering that VAT from customers whom he has supplied, or from higher prices in the future or (as far as we can see) from any other source. 
30.	Mr. Holl expressly asked the Tribunal for a fully reasoned decision, even though this is a “reasonable excuse” appeal (cf. rule 30(8), VAT Tribunals Rules 1986).
31.	Our full reasons amplify what we have said in paragraphs 27 to 29 inclusive above.
32.	As we understand the position, the Appellant’s arrangements did not in fact satisfy the conditions for the application of the agreement between the National Federation of Hairdressers and the Commissioners only because his agreement with the stylists was not in writing. Certainly this was the only point taken on the agreement by Mr. Holl. 
33.	We agree with Mr. Johnson’s comments on the rationale of not having written agreements and on the minimal difference which having one might have made in the determination of the actual contractual relationship between the parties.
34.	But the chief reason why we regard this point as not preventing us from concluding that the Appellant had a reasonable excuse for the late registration is that we consider that the form the agreement with the stylists took (as opposed to the content of that agreement) was reasonably regarded by the Appellant as not likely to be determinative of the VAT characterisation of supplies he made to the stylists.
35.	We consider that s.71(1)(b) VATA is directed to reliance by an appellant on a person performing an administrative task (most obviously the timely completion of a return to the Commissioners) and is not directed to reliance by an appellant on advice received from an accountant or the VAT helpline as to the correct obligations the appellant has vis à vis the Commissioners.  We consider that the giving of such advice is not a “task” within s.71(1)(b), nor is any other activity (for example, calculating VAT turnover) which is undertaken either to enable such advice to be given or in pursuance of such advice having been given and accepted.  Therefore we hold that s.71(1)(b) is not engaged on the facts of this case. 
36.	The penalty was calculated on the basis that the VAT liability arising from the failure to register was £80,547.90.  We are satisfied on the evidence that the discharge of this VAT liability will present very serious difficulties indeed to the Appellant.  He has, we find, and as Mr. Johnson found before us, been honest throughout.  He has also, we consider, behaved reasonably.  As things have turned out, he has acted on an erroneous view of the law (though Mr. Johnson thought otherwise).  He cannot recoup the VAT liability from anyone else.  VAT is, in principle, intended to be a “neutral” tax not borne in an economic sense by a fully taxable trader.  The Appellant is, apparently, liable to pay the Commissioners £80,547.90 in back VAT.  We consider that any penalty for late registration in the circumstances of this case in addition to the liability for the back VAT would be disproportionate.
37.	For these reasons we allow the appeal.
38.	When we announced our decision on the appeal, Mr. Young asked for the Appellant’s reasonable costs to be agreed.  Mr. Holl “vehemently opposed” (his words) any award of costs, because the Appellant’s representatives had been contacted on at least two occasions to seek resolution of the appeal and the offer made by the Commissioners (which was not disclosed to the Tribunal) had not been responded to.
39.	We consider that this is not a reason to depart from the usual rule that costs follow the event.  We observe that if the Commissioners had wanted to settle the appeal before the hearing, Mr. Holl had the opportunity to attempt to do so in discussions with Mr. Young before the appeal came on for hearing.
40.	We order the Commissioners to pay the Appellant’s costs, to be assessed on the standard basis by a Chairman sitting alone if not agreed.   

JOHN WALTERS QC

CHAIRMAN
RELEASE DATE: 23 May 2008

LON/2006/0758