United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2004] UKVAT V18760

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Timms v Customs and Excise [2004] UKVAT V18760 (09 September 2004)

18760

REGISTRATION – Compulsory registration – Appellant a tree surgeon who employed sub-contractors – Whether his turnover should include work done by sub-contractors – Appeal dismissed

LONDON TRIBUNAL CENTRE

RAYMOND JOHN TIMMS Appellant

and –

THE COMMISSIONERS OF CUSTOMS AND EXCISE Respondents

Tribunal: MISS J C GORT (Chairman)

MR R S SURI

Sitting in public in London on 23 July 2004

Mr R A Hughes, chartered accountant, for the Appellant

Miss Caroline Neenan of counsel, for the Respondents

© CROWN COPYRIGHT 2004


 


DECISION

1. This is an appeal against a decision of the Commissioners to compulsorily to register the Appellant with effect from 1 May 2001, subsequently amended to 1 September 2002.
2. The Appellant initially disputed that he should be required to register for the purpose of VAT at all. In any event he considers that he should be permitted to deregister with effect from 1 April 2003, rather than with effect from 3 February 2004, as permitted by the Commissioners.
3. The Appellant is a tree surgeon who is now 68 years of age. In about March 2001 he was asked by a private customer to do a large amount of work at his business premises. In order to maintain the goodwill of that customer he agreed to do the work, although it was a large job that he was unable to do by himself, he therefore engaged a sub-contractor to do some of the work for him. The consequence of this was that in March 2001 the Appellant had an exceptionally high turnover of £12,200. The Appellant's previous highest monthly total had been £5,320 in September 2000.
4. The Appellant's Self Assessment form submitted to the Inland Revenue for the period 6 April 2000 to 5 April 2001 showed a gross figure of £55,046. As a consequence the Commissioners' shadow economy team looked into the Appellant's affairs. Initially it was decided that the Appellant was liable to be registered with effect from 1 May 2001, but subsequently, following considerable correspondence between the Appellant's accountant, Mr Hughes, and the Commissioners and following various requests for reconsideration, by a letter dated 15 September 2003 the Appellant was notified that exception from liability to register with effect from 1 May 2001 would be granted, as March 2001 was a month with an exceptionally high turnover. Because the registration threshold was again breached in July 2002, the Commissioners decided that the Appellant would be liable to registration with effect from 1 September 2002. By the same letter the Appellant was also notified that all work done by sub-contractors should be included in the Appellant's turnover for VAT purposes, and clarification was sought of his present arrangements with the sub-contractors in order to determine whether deregistration was appropriate.
5. The Appellant's accounts for the year ended 5 April 2001 and 5 April 2002 both showed a global figure for the value of work undertaken as respectively £55,046 and £53,845, less sub-contracted work in the sums respectively of £21,480 and £20,630. The value of work done by the Appellant alone was respectively £33,566 and £33,215 for the two years.
6. After the Commissioners had started enquiring into the Appellant's tax affairs, from April 2003 the Appellant changed his method of dealing with the sub-contractors. Whereas previously a client would pay the Appellant the full amount of a particular job and the Appellant would then pay the sub-contractor, as from April 2003 where a sub-contractor was involved, the customer was informed that he would have to pay the sub-contractor separately. An application to deregister was made at this time.
7. The Appellant, Mr Timms, gave evidence before the Tribunal to the effect inter alia that he would supervise all the work which was done. He would initially give an estimate to the customer, and, if a job were too large for him to manage on his own, he would contact a sub-contractor. After April 2003 the sub-contractor would be paid by the customer on a daily rate basis. Mr Timms would tell the customer what he would be expected to pay to the sub-contractor. He would expect the customer to contact him if he were not satisfied with the job, as he was the one who was responsible.
8. Mr Timms had not considered that he was liable to register for value added tax because his personal income was well below the VAT limit. The sub-contractors were self-employed, but prior to April 2003, Mr Timms had received all the money from the customer from which he then paid the sub-contractor, raising an invoice to the sub-contractor. Since April 2003 Mr Timms would still only raise one invoice for the full amount, but the invoice would be broken down to show a separate amount owing to the sub-contractor by the customer.
9. The Tribunal also heard evidence from two officers of Customs and Excise, Robert William Nex, an officer with the shadow economy team based in Oxford, and Sharon Kathryn Howard from the Wolverhampton VAT unit. Mr Nex had had a meeting with Mr Hughes, who had throughout been acting as the Appellant's accountant. There had previously been considerable correspondence between them. The meeting took place on 4 March 2003 and as a consequence the Appellant had changed his method of working with sub-contractors, as set out above. Mrs Howard was responsible for reviewing Mr Nex's decision to register the Appellant from 1 May 2001. She had made the decision that the Appellant should be granted exception from registration with effect from 1 May 2001, but should be registered with effect from 1 September 2002. There was considerable correspondence between Mr Hughes and the Commissioners. A bundle of this correspondence and other relevant documents was produced at the Tribunal.
10. The relevant figures for registration for value added tax were as follows:

April 2001-2002 £54,000

April 2002-2003 £55,000

April 2003-2004 £56,000

The relevant sum for deregistration is £2,000 less in each year.

Legislative provisions

11. The Value Added Tax Act 1994 provides as follows:

4(1) VAT should be charged on any supply of goods or services made in the United Kingdom, where it is a taxable supply made by a taxable person in the course or furtherance of any business carried on by him.

(2) A taxable supply is a supply of goods or services made in the United Kingdom other than an exempt supply.

Section 25(1) of the 1994 Act provides:

A taxable person shall –

(a) in respect of supplies made by him … account for and pay VAT by reference to such periods (in this Act referred to as `accounting periods') at such time and in such manner as may be determined by or under regulations and regulations may make different provision for different circumstances.

Paragraph 4(1) of Schedule 1 to the 1994 Act provides:

Subject to sub-paragraph 2 below, a person who has become liable to be registered under this Schedule shall cease to be so liable at any time after being registered if the Commissioners are satisfied that the value of his taxable supplies in the period of one year then beginning will not exceed [£56,000].

Paragraph 13(1) of Schedule 1 provides that:

… where a registered person satisfies the Commissioners that he is not liable to be registered under this Schedule, they shall, if he so requests, cancel his registration with effect from the day on which the request is made or from such later date as may be agreed between them and him.

The Appellant's case

12. It was submitted on behalf of the Appellant that, as he had not personally received any benefit from the money that went to the sub-contractors, he should not be liable to account for value added tax on such amounts. Furthermore the sub-contractors had not worked exclusively for the Appellant.
13. Mr Hughes objected that the shadow economy team should have investigated the Appellant's affairs, when he was clearly submitting his returns and he was not in any way a part of the shadow economy. He had had reasonable grounds for not registering at the relevant time because he had misunderstood the law. There was inadequate consideration given by the Commissioners to the evidence put forward on behalf of the Appellant to show that in future the turnover would be below the required limits. This was contained in the Appellant's application to cancel his registration as from 1 April 2003 when he gave his expected value of taxable supplies for the following twelve months as between £30,000 and £35,000. This application was accompanied by a note informing the Commissioners that the Appellant had restructured his business.
14. By a letter dated 23 November 2003 Mr Hughes had informed the Commissioners that the Appellant's gross figures for February and March 2003 were £3,145 and £3,520 respectively, and that at that time the annual deregistration limit of £54,000 meant an average turnover of £4,500 per month, whereas the Appellant's average was £4,284. It would have been reasonable at 1 April 2003 to have concluded that the turnover for the forthcoming year would be below the deregistration limit.
15. Mr Hughes complained of the delay in the Commissioners' acknowledging the Appellant's application to deregister. The dispute between the parties could have been addressed earlier. It had not been until August that Mr Hughes had had a reply. The Appellant had not charged any value added tax since April 2003 because he had believed that he would be deregistered from the date of his application.
16. It was further submitted that the Commissioners should have allowed the Appellant retrospective exception to registration.

The Respondents' case

17. It was submitted that:

(i) The Appellant is a person who became liable to register for the purposes of VAT with effect from 1 September 2002; and

(ii) The Commissioners were not satisfied that the value of the Appellant's taxable supplies fell below the registration limit until 3 February 2004.

18. The value of taxable supplies means the gross value of all standard and/or zero-rated supplies of goods and/or services. The value of such taxable supplies was the amount, including profit, that suppliers charged to their customers for their supplies. The Appellant's evidence showed that he negotiated with the customer, and even since he had restructured his business, he only issued one invoice, even though the customer paid by separate cheques. His evidence showed that there was one single business of which he was the proprietor. It was therefore appropriate to register the Appellant for value added tax and to require him to account for the total amount on the single supply as he had exceeded the threshold.
19. The Tribunal was referred to the case of Michael Wilson t/a M&S Interiors (VAT Decision 17494) in which it was considered whether the services of fitters of kitchen were supplied to the customers or to the appellants. It was held that they were supplied to the appellants.
20. With regard to the date on which the Appellant was able to deregister, the figures showed that the registration threshold was breached in July 2002 which rendered the Appellant liable for registration with effect from 1 September 2002.
21. Finally it was submitted that the question for the Tribunal was whether the Commissioners had acted reasonably, on Wednesbury grounds. In this respect the Tribunal was referred to the case of Susan Wilkes t/a Dipton Chippy v Commissioners of Customs and Excise (Tribunal Decision No.16652).
22. Finally, for the avoidance of doubt, it was the Commissioners' case that "misunderstanding" was not an appealable matter within section 83 of the 1994 Act.

Reasons for decision

23. The grounds of appeal in this case relate only to whether the Appellant should be required to register for value added tax at all, and if so, it was contended that registration should only be required from 1 September 2002 and not from 1 May 2001. There was no reference in the grounds of appeal to the appropriate date for deregistration, and we were not asked for retrospective leave to amend the grounds of appeal. However, both parties addressed us on this issue, and therefore we will consider it de bene esse.
24. Because there has clearly been a certain amount of misunderstanding and lack of trust between the parties, we wish to state that we found Mr Timms to be a completely straightforward, honest and reliable witness. There has never been any question of his deliberately attempting to evade his liability for value added tax. It is extremely unfortunate that when negotiations between Mr Hughes on the Appellant's behalf and the Commissioners took place there was no clear direction from the Commissioners as to how, in his circumstances, Mr Timms could proceed without becoming liable for value added tax on the work done by the sub-contractors. We have no doubt that had anybody from the Commissioners properly explained the basis for his liability he would have changed his working practices appropriately.
25. This is not a case where Mr Timms has received value added tax for which he has not accounted, nor had he personally received any of the money in respect of which he is now required to pay value added tax.
26. With regard to the primary issue, namely whether Mr Timms should have accounted for value added tax on the services supplied by the sub-contractors, Mr Timms' very frank evidence made abundantly clear that he should have done so. It was Mr Timms himself who negotiated the total price of the contract and this was done without consultation with the sub-contractors. It was Mr Timms who chose the sub-contractors, and to Mr Timms that the customers would look should anything go wrong. Furthermore it was Mr Timms who invoiced the customers, the sub-contractors did not produce a separate invoice. The fact that the customers would issue a separate cheque to the sub-contractor did not create a separate contract between the customer and the sub-contractor. In order not to be liable, Mr Timms would have to show that there was a separate contract between the customer and the sub-contractor. For there to be a separate contract there would have to be some opportunity for the customer to negotiate with the sub-contractor as to terms and conditions. It would also have to be to the sub-contractor that the client would look in the event of any problems. That was not the case here.
27. The second ground of appeal which was before us was as to the date from which the Appellant should be required to register. However, that matter was considered by the Commissioners prior to the hearing of the appeal and it was accepted by them that he would not be required to register prior to 1 September 2002.
28. Whilst technically the matter is not before us as stated above we did hear evidence as to whether the Appellant should be deregistered from 1 April 2003 or 3 February 2004. The principal argument on behalf of the Appellant as to why he should be deregistered with effect from 1 April 2003 was on the basis that he had restructured his business at that point, so that the customers were paying the sub-contractors. As we have stated, we do not find that by restructuring his business as he did that the Appellant succeeded in avoiding liability for VAT, and therefore the matter of when he fell to be deregistered has to be considered with regard to his turnover figures, including those of the sub-contractors.
29. The Appellant relied on HM Customs and Excise Notice 700/11 issued in May 2002 regarding cancelling registration. At paragraph 2.2 which is headed "voluntary deregistration" it states inter alia that you can ask for voluntary deregistration if you can satisfy the Commissioners that your taxable turnover in the next twelve months will not exceed the registration limit. In the present case the Respondents had looked at the situation as it was in the previous twelve months when the turnover was above the threshold. Given that the Appellant had not succeeded in restructuring his business such that the sub-contractors were acting independently, and given that the Appellant's turnover continued at very much the same rate as before, albeit some months were below the average which would allow deregistration, others were well above it, it cannot be said that the Commissioners acted unreasonably in not allowing the Appellant to deregister until February 2004.
30. With regard to the issue of retrospective exception to registration, the legislation does not allow for this, it is a matter within the Commissioners' discretion, and is not a matter over which the Tribunal has jurisdiction. Although the question of when the Appellant should have been entitled to deregister was not an issue before us, and is a matter over which we have no jurisdiction, nonetheless given that the Appellant was never properly advised as to how to proceed, given that it was accepted by Mrs Howard that at the relevant time he was below the deregistration limit, and that the refusal to deregister was made on the basis of a forward look, and finally given that this is not a case where the Appellant has received the money which has given rise to the requirement to pay value added tax, and has been utterly straightforward in his dealings with the Commissioners, we wonder whether or not this is a case where the Commissioners might consider exercising any such discretion as they have, and would recommend that in any event consideration be given to allowing payment of any such tax as may be owing to be made over an extended period.
31. This appeal is dismissed. No order for costs.

MISS J C GORT

CHAIRMAN

Release Date: 9 September 2004

LON/03/845