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Cite as: [2009] UKFTT 84 (TC)

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Sivarajah (t/a Everest Curry King) v Revenue & Customs [2009] UKFTT 84 (TC) (01 May 2009)
VAT - PENALTIES
Reasonable excuse

[2009] UKFTT 84 (TC)

TC00052

Appeal number: LON/08/2028

VAT – DEFAULT SURCHARGE – reasonable excuse – reliance on others – illness of spouse – appeal dismissed

FIRST-TIER TRIBUNAL

TAX

SINNATHABY SIVARAJAH

T/A EVEREST CURRY KING

Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S

REVENUE AND CUSTOMS (VAT) Respondents

TRIBUNAL: Barbara Mosedale (Chairman)

Lynneth Salisbury (Member)

Sitting in public in London on 1 April 2009

Mr B Athanas of Athanas Associates for the Appellant

Mr Holl instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009

DECISION

Introduction

Mr Sinnathaby Sivarajah, the taxpayer, appeals against a late registration penalty imposed under the Value Added Tax Act 1994 s67 by an assessment dated 2 June 2008 at a rate of 15%. The penalty as originally assessed was for £2449 which included 25% mitigation. A few days before the hearing HMRC wrote to the Appellant mitigating the penalty by another 25% to £1,633.

Applicable law

The penalty assessed on the Appellant was imposed under the Value Added Tax Act 1994 ("VATA 94") s67(1). This provides that a person who fails to notify HMRC of their liability to register for VAT shall be liable to a penalty equal to the specified percentage of the "relevant VAT". The "relevant VAT" is defined under s67(3) as the VAT due for the period from when he should have been registered to when he did in fact notify HMRC. Section 67(4) sets out the specified percentage and under s67(4)(c) it is 15% in any case where the time between the date on which the taxpayer ought to have registered by law and actually notified HMRC of his liability to register is greater than 18 months.

Section 67(8) provides that a failure to register under s67(1) shall not give rise to a penalty if the tribunal is satisfied that there is a reasonable excuse for his conduct. Section 71(1) provides that:

"(b) where reliance is placed on any other person to perform any task, neither the fact of that reliance nor any dilatoriness or inaccuracy on the part of the person relied upon is a reasonable excuse"

Findings of fact

The facts were not in dispute between the parties and we find them to be as follows:

(1) The taxpayer started up a café and takeaway business in 2002. It was below the VAT registration threshold but business picked up in 2006 and the taxpayer became liable to VAT registration. In his Application for Registration (VAT 1) dated 10 November 2007 the taxpayer stated that he went over the compulsory registration threshold in February 2006 and applied to be registered from 1 February 2006. HMRC calculated that in fact he was only liable to compulsory registration from 1 April 2006 and the penalty for late registration was calculated from this later date.

(2) The time lapse between the date of liability to compulsory registration (1 April 2006) and actual notification of liability to register (10 November 2007) was therefore over 19 months. This led to HMRC calculating the penalty with a specified percentage of 15%;

(3) The "relevant VAT" figure used to calculate the penalty was based on the taxpayer's annual turnover declared in his application for VAT registration. This was because no returns were provided. The appellant said he was unable to provide returns as his former accountant had not kept records for his business. The appellant did not dispute the correctness of the VAT figure of £21,777.32 used by HMRC.

(4) The penalty was therefore calculated to be £3266.59 but HMRC mitigated the penalty by 25% in recognition that the taxpayer had voluntarily come forward to notify HMRC of his belated liability to register. The assessment was therefore for £2449. The penalty was reduced by a further 25% on 27 March 2009: the reason for this seems to be a misunderstanding between officers of HMRC. One recommended a without prejudice offer of the further 25% reduction in order to settle the appeal without a hearing: this was misunderstood and the other officer wrote to the taxpayer notifying a reduction in the penalty without making it conditional. So by the date of the hearing the penalty was for £1,633 with 50% mitigation.

(5) There was no suggestion of bad faith on the part of the taxpayer. He had not realised he should have registered and had come forward voluntarily when he found out that he was so liable;

(6) The taxpayer's wife was seriously ill and has been so for a long time. From 2001 she was suffering from severe rheumatoid arthritis and was housebound most of the time and in need of care throughout the day. During this time the taxpayer was her full time carer and had to employ a succession of managers to run his business. He had some presence in the business but could it seems only come & go. The managers he employed were inexperienced and did not realise that there was a liability to register for VAT.

(7) The taxpayer also relied on his former accountant, who, he said, was really just a book-keeper. This accountant did not inform the taxpayer of his liability to register and failed to keep business records. The taxpayer only discovered he might have a liability to register for VAT when speaking to another businessmen in September 2007. He notified HMRC in November 2007. He instructed a new accountant, Mr Athanas, who representated him at the hearing, in July 2008.

(8) The taxpayer's wife was admitted into hospital on 22 February 2007 suffering from with breathing problems and discharged on 28 March 2007 leaving the taxpayer during that time able to devote even less time to the business than normal.

(9) It was also not disputed that the taxpayer himself was suffering from stress in 2008 and 2009 and did eventually in 2009 give up the business although it was not suggested that this was relevant to the failure to register in 2006.

Area of dispute

The dispute between the parties was whether the taxpayer had a reasonable excuse within the meaning of s67 for his late registration.

The taxpayer considered that he had a reasonable excuse because, firstly, he acted in good faith; secondly, he had relied heavily on his accountant-cum-bookkeeper who had not told him of his VAT liabilities; and, thirdly, that because of his wife's illness he was unable to run the business himself and had to leave it in the hands of managers.

HMRC's view was that the illness of the taxpayer's wife was not sudden or unexpected but long-term. It was the taxpayer's business and he was responsible for complying with the law in respect of it. His wife's sudden admission to hospital in February 2007, which might amount to a reasonable excuse for failing to do something at that time, could not be a reasonable excuse for a failure to register which commenced ten months earlier.

HMRC's view of the taxpayer's reliance on his accountant and on his business managers was that this could not amount to a reasonable excuse because of s71(1)(b) which we have set out above and provides that neither the fact of that reliance on another person nor that person's inadequacies in discharging their responsibilities could be a reasonable excuse.

On the contrary, Mr Athanas considered that reliance on a third party could amount to a reasonable excuse and cited an article referring to Rowland v HMRC (2006) SpC 548. In that case the Special Commissioner ruled that that taxpayer had a reasonable excuse for non-payment of capital gains tax on the due date because she had relied on her specialist accountants who had informed her she was not liable to pay.

Our decision

We found that the taxpayer did not have a reasonable excuse for his late registration. Good faith is a matter for mitigation only: acting in good faith but in ignorance of the law is not a reasonable excuse.

We did not find the appellant's reliance on his book-keeper or his managers to be a reasonable excuse. VATA 94 s71(1)(b) provides that for VAT late registration penalties, the fact of reliance on a third party, and any "dilatoriness or inaccuracy" on the part of the third party, cannot be a reasonable excuse. The position may well be different for direct taxes, as appears from the case of Rowland: but the penalty in that case was imposed under the Taxes Management Act which does not have a provision comparable to s71(1)(b) of the VAT Act excluding reliance on third parties as a reasonable excuse. In any event, even if the appellant's reliance on third parties could be a reasonable excuse, we did not consider that it would be in this case: it was not reasonable to rely on someone who was described only as a book-keeper and who did not keep records. Nor was it reasonable to rely on the succession of managers employed to take the appellant's place in the café when he could not be there. There was no evidence that the book-keeper nor the managers were in fact given any responsibility for the appellant's tax affairs.

We did not consider his wife's illness to amount to a reasonable excuse either. Her hospital admission in 2007 could not be the cause of his failure to register in 2006. While we are sympathetic to the taxpayer's difficult personal circumstances, he nevertheless chose to run a business while having fairly full-time responsibility for his sick wife. Her illness was not sudden but existed the entire time while he was running his business. We were of the view that he must take responsibility for running his business within the terms of the law which includes ensuring that VAT liabilities are met.

Mitigation

Under VAT Act 1984 s70 tribunals have the power to mitigate a penalty or to reduce mitigation given by HMRC. We considered it appropriate that HMRC had given mitigation on the basis of the taxpayer's good faith in that he had voluntarily notified that he was in default of his liability to register. We saw no reason to interfere with HMRC's mitigation of 50%.

Accordingly we find that the Appellant does not have a reasonable excuse for the late registration and confirm that the penalty of £1,633 is payable and we dismiss the appeal.

The Appellant has a right to apply for permission to appeal against this decision pursuant to Rule 39 of the Rules. 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.

TRIBUNAL JUDGE

RELEASE DATE: 1 May 2009