United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2005] UKVAT V19216

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Michael John Clements v Her Majesty's Revenue and Customs [2005] UKVAT V19216 (18 August 2005)

19216

VALUE ADDED TAX – whether the Appellant properly registered for VAT purposes – paragraph 1(1)(a), Schedule 1, VATA – whether the exception from registration under paragraph 1(3), Schedule I, VATA applied – Customs refusing to take into account uncorroborated representations by the Appellant – Tribunal accepting the Appellant's representations as to his expectations of the level of his future turnover as at the relevant date as truthful, and finding facts accordingly – finding that Customs had acted in a way in which no reasonable panel of Commissioners could have acted in refusing to give the Appellant retrospective exception from liability to register for VAT purposes under paragraph 1(3), Schedule 1, VATA – appeal against compulsory retrospective registration allowed – appeals against resultant assessment to VAT and penalty for belated notification raised under section 67 VATA allowed

LONDON TRIBUNAL CENTRE

MICHAEL JOHN CLEMENTS Appellant

- and -

HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: JOHN WALTERS QC (Chairman)

Sitting in public in London on 18 May 2005

The Appellant appeared in person

Mrs. P. Crinnion, Solicitor, appeared on behalf of the Respondents

© CROWN COPYRIGHT 2005

DECISION

Introduction

Michael John Clements ("the Appellant") appeals against a decision by the Respondents (then the Commissioners of Customs and Excise) to register him for VAT purposes with effect from 1 August 1997.

The Notice of Appeal is dated 24 May 2004 and states, among other things, that the approximate sum of money in dispute is £5,000. There is with the Tribunal's papers a copy of a Notice of Assessment, issued on 12 January 2004, charging the Appellant with VAT of £4,458 in respect of the period 1 August 1997 to 31 May 1998 (the effective date of the deregistration of the Appellant for VAT purposes). A belated notification penalty at 15 per cent of the tax assessed was also charged. The penalty is £668.79.

It is apparent that the Notice of Appeal was served late (the time-limit is 30 days after the date of the document containing the disputed decision: rule 4(1) of the VAT Tribunals Rules 1986 ("the Tribunals Rules")). Also, it became clear at the hearing that the Appellant wished to appeal against the assessment and the penalty as well as the decision to register him for VAT purposes. The Respondents have indicated no objection to any of these matters being adjudicated.

The Tribunal therefore formally extends the time for serving the Notice of Appeal so that the Notice of Appeal shall be treated as having been served in time (rule 19(1) of the Tribunals Rules) and directs that the Notice of Appeal be amended so that the assessment, its amount and the liability to the penalty are all in issue (rule 14(1) of the Tribunals Rules). The requirement for actual amendment of the Notice of Appeal is waived (rule 19(4) of the Tribunals Rules).

The facts

A bundle of documents was before the Tribunal. The Appellant gave evidence. For the Respondents, the Tribunal heard evidence from: Janice Stocker, an Officer of Customs and Excise, at the relevant time part of the Joint Shadow Economy Team ("JoSET"); Katherine Thompson, an Officer of Customs and Excise, at the relevant time responding to enquiries at Reading local VAT Office; and Helen Cox, an Officer of Customs and Excise, at the relevant time a reconsideration and review officer at the Respondents' Wolverhampton registration unit. What follows of a factual nature represents the Tribunal's findings of fact from the evidence, oral and documentary, before it.

The Appellant is a self-employed builder. He has been in business since 1977. The value of his taxable supplies, for VAT purposes, had been below the threshold (from time to time) requiring registration for VAT until a date in 1997. He was not aware of this until March or April in 1998, when he was informed of the position by his then accountant, who in the preparation of his income tax return had computed his profits for his accounting year ending in November 1997 from financial documentation provided by the Appellant.

This situation represented an aberrant rise in the Appellant's turnover. It reverted to a level below the compulsory VAT registration threshold (and indeed below the (lower) figure relevant for deregistration for VAT purposes) in the following year, 1998.

The Appellant discussed the position with his then-accountant and understood that the accountant would lodge an appeal, which would have the result that no VAT liability actually arose. However no such appeal, or germane correspondence, was received by the Respondents. The result was that the situation was not addressed until early 2001, when Officer Stocker, as part of the JoSET's work in identifying people who should be, but were not, registered for VAT purposes, commenced an investigation into the Appellant's case.

In May 2001, the accountant acting for the Appellant forwarded to Officer Stocker a monthly analysis of the Appellant's turnover for the periods from November 1995 to November 1998. From these figures, which were accepted as accurate by the Respondents, it appeared that the Appellant was, at least prima facie, liable to be registered for VAT purposes as from 1 August 1997, because his turnover for the 12 months ended 30 June 1997 was (for the first time) over £48,000, the applicable threshold for the purposes of paragraph 1(1)(a), Schedule 1, VAT Act 1994 ("VATA") – see: paragraph 5(2), Schedule 1, VATA. However, the figures also showed that with effect from the month ending 30 June 1998 he was consistently trading with a turnover below the de-registration figure of £46,000 mentioned in paragraph 4(1), Schedule 1, VATA. In consequence, the Appellant was deregistered with effect from 1 June 1998 on the initiative of the Respondents' Wolverhampton registration unit.

In particular (which has relevance to the Tribunal's consideration of paragraph 1(3), Schedule 1, VATA – see: below), the Appellant's turnover in the 12 months commencing on the date when he became liable to be registered pursuant to paragraph 1(1)(a), Schedule 1, VATA, ie. 30 June 1997 to 30 June 1998, was £44, 997.56.

The belated notification penalty of £668.79 (15 per cent of the VAT assessed of £4,458.57) was made under section 67 VATA.

The Appellant and a friend had bought a house together in 1984. The house was in the Reading area and house prices were relatively high and the Appellant's (and, I assume, his friend's) income was relatively low. This necessitated a joint purchase by the two of them as they wished to become property owners (to make "the first step on the property ladder"). However, as a result of their variable interest rate mortgage, their monthly commitments were such that they were under some financial strain. This led to the Appellant working extra hours. By the mid 1990s he was, on his own evidence, which the Tribunal accepts, taking on too much and having to hire subcontractors to help. He explained all of this to the Respondents in a letter dated 21 June 2003. He went on in that letter to say:

"Although my turnover may have increased during this period, any profits became consumed by overcharging sub contractors taking advantage of my situation. This short sharp lesson would teach me that any skills I possessed were with shovel & not with pen. Therefore this became one of the many reasons why we decided to sell the house during 1997. From this point I had decided to go back to working alone, doing small building works. So I was certain that the turnover would never exceed or get anywhere near the levels of 1997."

He confirmed this point in a letter to the Respondents dated 20 July 2003 as follows:

"From November 1997 to around mid 1998 I reduced my working practices to suit working alone. As is the situation to this day."

In another letter to the Respondents (dated 6 June 2003) the Appellant had written that by 1997 the circumstances of both his friend and himself had changed and they needed to sell the house. He gave the following explanation for the increase of turnover in 1997:

"To do so [ie. to sell the house], much repair work needed to be done. All building materials were bought using my merchant's accounts, for convenience. This was obviously a mistake, as this showed up in the accounts for that year."

In another letter to the Respondents (dated 18 March 2004) the Appellant explained the change of circumstances making it necessary to sell the house, namely that his friend wanted to get married and that he and his girlfriend had a small child.

The Appellant and his friend sold the house in November 1997.

The issue for decision

It emerged at the hearing that the real issue for the Tribunal's decision was whether the Respondents should have allowed the Appellant the benefit of "retrospective exception from registration" by reason of an expectation of a fall in his turnover after the period in which he was trading at a turnover above the registration threshold. This retrospective exception from registration is provided for by paragraph 1(3), Schedule 1, VATA and, so far as is relevant is in the following terms:

"(3) 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 be registered will not exceed £46,000."

As noted above, in fact, the Appellant's turnover in the period of one year mentioned in paragraph 1(3), Schedule 1, VATA was £44,997.56, significantly less than £46,000.

Officer Stocker said in evidence that the Respondents are now (with the benefit of hindsight) satisfied that this was the position. However, the Respondents' case, most effectively put in evidence by Officer Cox, was that the relevant departmental guidance ("V1-28 Registration") based on, or confirmed by, the decision of a Tribunal in Richard John Nash & Janet Nash v Commissioners of Customs and Excise (1997), Tribunal Decision 14944, is that paragraph 1(3) gives the Respondents a discretion to allow requests for retrospective exception, which will be considered on the basis of reasonableness. An applicant must show that there was information which would have been available at the time specified in paragraph 1(3), that is, at the time at which he would prima facie become liable to be registered – in this case 1 August 1997 – which would have led the Respondents to grant exception from registration at that time (see: V1-28, paragraph 3.20). The guidance goes on to specify (see: V1-28, Table 10) the matters, which should be taken into account in considering an application for exception from registration. They are: "the nature of the business and any seasonal fluctuations; the taxable turnover in the previous years; any recent sustained increase in turnover; and contracts, orders, etc. in existence at the time of the application". Clearly, in context, the reference to contracts, orders, etc. in existence at the time of the application is to be construed in the case of a retrospective application as a reference to contracts, orders, etc. in existence at the time at which the applicant would prima facie become liable to be registered.

Officer Cox said that the Appellant had provided no information which could satisfy the Respondents that at June 1997 he could have expected to have a reduced turnover in the following year.

She said that this was the position notwithstanding the fact that she had considered the letter dated 21 June 2003 referred to above. She said that the Respondents required to be satisfied, and that this meant that there must be some form of documentary evidence to show that as at June 1997 the Respondents would have been satisfied that the Appellant's turnover would be below £46,000 in the next 12 months. She said that without the backing of documentary evidence she could not take any action. She could not accept the Appellant's word uncorroborated by documentary evidence. She was not allowed to look at what actually happened (ie. that the Appellant's turnover in the event was below £46,000 in the 12 months commencing June 1997). She emphasised that she could only look at documentary evidence available at "the time of the breach" (ie. June 1997).

Decision

The Tribunal adopts the approach to the construction of paragraph 1(3), Schedule 1, VATA in circumstances of a retrospective application for exception from the registration requirement, which is set out in the decision of the Tribunal in Richard John Nash & Janet Nash, that approach being to follow the earlier Tribunal decision in W.F. Shephard v Commissioners of Customs and Excise (Tribunal reference: 3023).

A trader can seek retrospectively to rely on the exception "if the value of his taxable supplies in the year [beginning at the time at which, apart from the exception, he would become liable to be registered for VAT purposes] did not exceed the relevant amount and he establishes that no reasonable body of Commissioners at the relevant time ([original] emphasis) could have come to any conclusion other than that his taxable supplies in the year would not exceed the relevant amount". (Nash & Nash, paragraph 23).

The tribunal also adopts the conclusion of the Tribunal in Nash & Nash (ibid. at paragraph 19) that its role in considering the Respondents' consideration of the issues arising under paragraph 1(3), Schedule 1, VATA is supervisory. That is, following the decision of the House of Lords in Commissioners of Customs and Excise v J. H. Corbitt (Numismatists) Limited [1980] STC 231, the Tribunal can only properly allow the appeal on this point "if it were shown the Commissioners had acted in a way in which no reasonable panel of Commissioners could have acted; if they had taken into account some irrelevant matter or had disregarded something to which they should have given weight".

On the evidence before the Tribunal, I have found the following relevant facts, accepting the truthfulness of the Appellant's representations to the Respondents in his letters to them:

• By the mid 1990s the Appellant was taking on too much work and was having to hire subcontractors to help;

• The profits arising from the increased turnover which this extra work produced became to a significant extent consumed by sub contractors' charges;

• This was one reason why the Appellant and his friend decided to sell the house during 1997;

• The Appellant had decided that after the sale of the house, he would go back to working alone, doing small building works;

• For this reason he was certain that the turnover would never exceed or get anywhere near the levels of 1997;

• From November 1997 to around mid 1998 the Appellant reduced his working practices to suit working alone;

• Before the house could be sold, much repair work needed to be done;

• Another reason why it was necessary to sell the house was that the Appellant's friend wanted to get married and that he and his girlfriend had a small child;

• The Appellant and his friend sold the house in November 1997.

I infer (as a finding of fact) that the Appellant had decided by 30 June 1997 to sell the house and go back to working alone and therefore at that time had the expectation that his turnover for the next 12 months (and thereafter) would never "get anywhere near the levels of 1997", which I infer was an expectation that it would not exceed £46,000.

The Commissioners took none of these facts into account in deciding not to grant the Appellant retrospective exception from registration. Their reason for doing so was not that Officer Cox disbelieved the relevant representations of fact which the Appellant made, but that she considered that she could only take them into account if she had independent documentary corroboration of them. The Tribunal was not referred to anything in the Respondents' guidance notes "V1-28 Registration" which would justify this approach as a matter of the Respondents' policy.

In the Tribunal's judgment Officer Cox was in error in this approach. She should have considered whether or not to take into account the relevant representations of fact being made by the Appellant. In doing so she would have had regard to the fact that the representations were uncorroborated; but at the same time she could have regarded the eventuality (namely that the Appellant's turnover was in the event reduced after November 1997) as to some extent corroborative of his explanation. In doing so she would have had regard to events subsequent to 30 June 1997, not for the purpose of ex post facto justifying a view that the turnover in the 12 months beginning with that date would be less than £46,000, but for the purpose of assessing the weight of the evidence that there was at that date an expectation that this would turn out to be the case.

In the event the Respondents (through Officer Cox) disregarded something to which they should have given weight (namely the facts found at paragraphs 25 and 26 above) and in consequence the Appellant has shown that the Commissioners had acted in a way in which no reasonable panel of Commissioners could have acted in refusing to give him retrospective exception from liability to register for VAT purposes pursuant to paragraph 1(3), Schedule 1, VATA.

It follows that the Tribunal allows the Appellant's appeal against the Respondents' decision to register him for VAT purposes with effect from 1 August 1997.

The legal basis for the assessment to VAT issued on 12 January 2004 therefore falls away and the Appellant's appeal against it is also allowed.

Likewise the legal basis for the belated notification penalty raised under section 67 VATA falls away and the Appellant's appeal against it is also allowed.

Costs

The Appellant made no application for costs at the hearing. The Tribunal grants him liberty to apply to a Chairman of these Tribunals sitting alone for an order for costs under rule 29 if he is unable to agree with the Respondents that they will pay him his reasonable costs of the appeal, or he is unable to agree with them the amount of such costs.

JOHN WALTERS QC

CHAIRMAN

RELEASED: 18 August 2005

LON/2004/1026