United Kingdom VAT & Duties Tribunals Decisions

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Cite as: [2007] UKVAT V20469

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Michael James Casban Partnership with Gillian Casban (wife) (t/a Lounge v Revenue & Customs [2007] UKVAT V20469 (26 November 2007)

20469

Value Added Tax - Whether the Appellant had given notice to de-register for VAT purposes - Appeal Allowed

LONDON TRIBUNAL CENTRE

MICHAEL JAMES CASBANPARTNERSHIP WITH Appellant

GILLIAN CASBAN (wife) T/A LOUNGE

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Tribunal: HOWARD M NOWLAN (Chairman)

MRS NORAH CLARKE

Sitting in public in Cardiff on 9 November 2007

The Appellant in person

Gloria Orimoloye of HMRC's Solicitors' Office, for the Respondents

© CROWN COPYRIGHT 2007


 


DECISION

Introduction

1. This was an upsetting case where the Appellant had suffered a series of disasters, starting with a serious injury sustained in a motor-bike crash. In an attempt to find an occupation that he could pursue with his injuries (which made it impossible for him to sit down or stand up and walk for long periods) he and his wife commenced the business of running a small restaurant. This unfortunately resulted in serious losses, first because the lease, for the assignment of which he paid a £20,000 premium in the belief that there were nine years remaining of the initial ten year term, turned out to have two break clauses, the first of which enabled the landlord to terminate the lease two years after the Appellant acquired it. The appellant also suffered losses in the restaurant trading, and realised within about a year of embarking on the venture that with his disability he would not be able to dedicate enough time to the business, which was fatal to the viability of the restaurant. The break clause obviously made selling the restaurant difficult, and amongst other things we were told that the Appellant lost his house.
2. The VAT question which was the subject of this appeal was whether or not the Appellant had given notice to de-register for VAT purposes since his turnover was below the compulsory registration limit. It was accepted by HMRC that the Appellant's turnover in all periods was below the compulsory registration limit. The Appellant accepted that, through misunderstandings between himself and his accountant, he had initially registered for VAT purposes, and he accepted that he was thus liable for VAT for his first three-month trading period. He contended however that he had then telephoned the VAT enquiry line in order to seek deregistration, and on being told to put his request to deregister in writing, had sent a hand written letter confirming the request. He had however not kept a copy of the letter, did not recall to which VAT office he had sent the letter, and HMRC asserted that they had no record of either the phone call or the letter. There was no dispute that HMRC could not back-date deregistration to a date earlier that the date of the Notice to de-register given by the trader, and certainly no contention that the Appellant would have ceased to be liable to VAT merely because his turnover fell below, or indeed was always below, the compulsory registration level if he had registered for VAT purposes and failed to de-register.
3. Everything thus depended on whether we accepted the Appellant's evidence that he had made the 'phone call and sent the hand-written letter as he claimed. The Respondents accepted that the Appeal should be allowed if we accepted this critical claim made by the Appellant, but they challenged the relevant evidence first because they had no record of either the 'phone call or the receipt of the letter, and also because several later acts and filings by the Appellant strongly suggested that he considered himself still to be liable for VAT and still to be registered at various dates well after the alleged deregistration.
4. We decided this case in favour of the Appellant because we accepted his evidence. This written confirmation of that decision will focus principally on the various elements of conflicting evidence, on the character and credibility of the Appellant who gave evidence on oath, and on our reasons for accepting his evidence on the two critical matters. We will also comment shortly on why we accept that these findings justify the conclusion that the Appellant ceased to be liable for VAT on and after the date of the giving of the notice to deregister, albeit that the Respondents had confirmed at the outset that they would accept that this was indeed the result if we accepted the Appellant's evidence.

The facts in more detail

5. The Appellant embarked on his and his wife's partnership activity, borrowing on mortgage and paying a substantial amount for the lease referred to above without any prior business experience. Prior to his accident he had been employed as a marketing executive for wine and spirits businesses, travelling large distances in his car, and his only experience that remotely qualified him to run a restaurant was his considerable knowledge of wine. The first mistake made on account of his lack of experience was that he did not stop his accountant from registering the new partnership for VAT purposes on 26 February 2004 on the basis that the anticipated turnover would equal that of the previous trader, at £260,000 a year. Since the Appellant always assumed that he would only be able to open the restaurant for 20 hours a week, he never expected to have turnover in excess of the compulsory registration level, let alone of £260,000.
6. For the first three-month period the Appellant filed a VAT return though there was a default in paying the tax and a default surcharge was imposed. According to the Appellant's evidence he then realised that he was below the registration level, and since few of his costs (rent, wages and food as distinct from drink) would carry input tax, he was at a considerable disadvantage in being registered for VAT purposes when he did not need to be registered. By this stage he had made a number of contacts with various VAT offices, and he was confused as to which office he should contact in order to deregister but nevertheless asserted strongly that he had telephoned some office and asked to deregister. He then said that he was told to put his request in writing which he also claims that he did, though in a hand-written letter of which he did not keep a copy.
7. There then emerged a very confused picture. A significant fact, which seemed to us to support the Appellant's case that he thought that he had deregistered, was that he never completed another VAT return. It seemed to us improbable that the Appellant thought that he should be completing VAT returns but just became a serious defaulter and wrongly never filed another return. After all he had at least filed his return for the first period. Whilst the Appellant appeared thus to think that he was not liable for VAT and not liable to file returns, he did nevertheless make a telephone call to the VAT National Advice Service requesting various public notices relevant to the restaurant business. Also contacts between the Appellant and the Respondents in November 2004 and February 2005 seemed to suggest that the Appellant would be filing VAT returns in that he gave as his explanation for not filing returns first (as regards the return for 08/04) the recent death of his father, and secondly as regards that period and also the period 11/04 the loss of various documents in a break-in at his premises. An even more confusing point is that in April 2005 the Appellant completed a Customs & Excise questionnaire and stated that VAT was charged to his customers and that he also charged 17.5% VAT on all his supplies.
8. In November the Respondents issued a Distress Warrant on the Appellant and Bailiffs sought to contact him at his premises. When they visited in January 2006 there was a notice on the door stating "Closed down due to unfair practice by Landlord". What had in fact happened was that having realised that the business was too stressful for him, he had been trying to sell it since January 2005; one possible purchaser was unacceptable to the landlord; the impending termination of the lease then made the business un-saleable; so that the catering equipment was removed and on 20 December 2005 the business closed down.
9. On 14 June 2006 Officer Marion Stockwell visited the Appellant, to try to regularise his VAT affairs. This was the first visit, and indeed the first extensive contact between HMRC and the Appellant notwithstanding that his first VAT return had involved a default; that all later ones had shown nil returns, and that HMRC had sent in the bailiffs in December 2005 and January 2006. Several conflicting points emerged from this important discussion and Marion Stockwell gave evidence before us.
10. Most of Marion Stockwell's handwritten meeting note referred to points that were of great relevance to the Appellant but not of much relevance to VAT. In other words the Appellant gave a full summary of the various personal, financial and legal problems that he had had, including the fact that his house was up for sale. Amongst points that were of relevance to VAT was one sentence which said:

"Rang NAS 2^nd ¼ because was not going to make T/O"

When we asked Marion Stockwell what she inferred from this remark that was contained in her note, she confirmed very candidly that she assumed that the Appellant had rung the National Advice Service seeking deregistration. The meeting note itself contained nothing further however and did not mention the points that the Appellant himself asserted about being told to put his request in writing, and about having sent a handwritten letter.

11. The handwritten note made by Marion Stockwell did not appear to record the following point but we accept that she also gained the impression that the Appellant thought that if a business was trading below the turnover limit, it did not need to declare any VAT, whether registered or not. We certainly accept, both from the evidence of the Appellant himself and from the evidence given by Marion Stockwell, that the Appellant never thought, whenever from mid 2004 onwards he completed one or another form from HMRC that there was any prospect of him actually having to pay anything in VAT. Quite what significance he thought the various forms and questionnaires had was not made clear to us but we repeat the point that the only thing that was clear to us was that the Appellant thought that he had no possible liability for VAT after approximately mid 2004.
12. Following her visit, Marion Stockwell made full enquiries to ascertain whether HMRC had received any notification by the Appellant requesting deregistration, and she was unable to trace either a record of either the phone call or of the claimed handwritten confirmation of the request. She accordingly concluded that the Appellant had not deregistered, with the result that even though his turnover was below the compulsory registration level for all of the later periods in contention, he remained liable for VAT.
13. Marion Stockwell then computed the Appellant's turnover with whatever records she had and made an assessment of £6,395 on the Appellant.
14. Both the Appellant and counsel for the Respondents voiced various recriminations about the conduct of the other. The Appellant criticised the Respondents for having failed between about mid 2004 until June 2006 to visit him or to enquire specifically why he had either made no VAT returns or eventually submitted nil returns, following the first return that was made and that involved a default. Counsel for the Respondents criticised the Appellant for not having enquired again, when he heard nothing in response to the claimed handwritten letter, in order to verify that his deregistration had been accepted.

The law

15. There was no dispute about the law in the present case. It is clearly the case that a trader can be or remain registered for VAT purposes even though his turnover is below the compulsory registration threshold. Thus if a registered trader claims that his turnover has fallen below that level and wishes no longer to account for VAT, the trader must give written notice of this fact, the position must be confirmed by HMRC, and then the trader can be deregistered either from the date of the giving of the notice of from such later date as the parties agree. As counsel for HMRC mentioned, and as had been mentioned earlier to the Appellant there are cases where it suits traders to remain registered when their turnover is below the relevant threshold. We might just observe that this is most likely to be so where the trader has numerous taxable inputs and where the trader's customers are mostly VAT registered themselves, two features notably absent in the Appellant's case, but we accept that this has no bearing on the legal point that the trader who wishes to cease to be liable for VAT whose turnover falls below the compulsory registration level must deregister and does not automatically cease to be liable for VAT.

Our decision

16. This case accordingly revolves simply around whether or not we accept the Appellant's evidence that he 'phoned a VAT office to deregister in about June 2004 because his turnover had fallen below (or perhaps had always been below) the compulsory registration level, and when advised to do so, put that request in writing. The Appellant said that he had been very confused about which of various addresses he should write to and acknowledged that he may have written to the wrong office, but he confirmed adamantly that he had written this letter.
17. As we have already mentioned, counsel for the Respondents had accepted that the appeal should be allowed if we accepted the Appellant's claims just repeated in paragraph 16 above, though in the final paragraph of this decision we add one comment on that acceptance albeit on a point that was not raised before us.
18. We confirm that we immediately accepted the Appellant's evidence on the critical points and gave a short oral decision to that effect at the hearing. The remainder of this decision will explain why we both reached this conclusion, and how we reconcile this decision with some of the seemingly conflicting statements and answers and actions on the part of the Appellant after the mid-2004 date.
19. The first reason for our decision is that we found the Appellant an honest witness. He was certainly totally inexperienced in business and it would not be unfair to describe the Appellant's restaurant venture as a sad catalogue of disasters, following the initial disaster of his serious motor bike accident. We did not however gain the impression that at some point the Appellant, having first thought for a year and a half that he automatically dropped out of liability to VAT if his turnover fell below the threshold suddenly discovered that his only salvation would be to lie and fabricate a couple of claimed contacts about deregistration.
20. We attach great significant to the short meeting note that we quoted in paragraph 10 above. We are particularly influenced by the fact that the note reflects a claim that does not specifically refer to deregistration but simply suggests that this is what the 'phone call would have been about. We consider that if by the time of this meeting the Appellant had realised that he had got to lie about seeking deregistration and about sending in a confirmatory letter, he might have made the point rather more specifically in his meeting with Marion Stockwell. And if he had done enough research to decide to fabricate a story about deregistration, we think that he might have realised that he would need to mention the claimed written follow-up, though as we understand it this was not mentioned at the meeting. As it is, we find this particular entry in the meeting note made by Marion Stockwell to suggest that he did genuinely 'phone up some VAT office to seek deregistration, and we agree with the candid response that Marion Stockwell made when we asked her what she took this rather vague claim about low turnover actually to mean.
21. We understand that HMRC officers are meant to log all 'phone calls and to record and file all relevant correspondence, and we do not doubt that this high standard is regularly maintained. When however someone 'phones or writes to the wrong VAT office and when perhaps a junior officer or someone opening post takes a 'phone call or opens a slightly strange letter, perhaps addressed to an inappropriate office, we would not be surprised if that officer failed to log either the 'phone call or the letter.
22. Since the natural way in which the Appellant first referred to the claimed 'phone call leads us to accept that that call was made for the reasons already given, we now deal with whether we accept that the Appellant wrote the follow-up letter. We first accept that it seems very realistic to accept that the person to whom the Appellant spoke on the 'phone would have told the Appellant to confirm the point in writing. That was indeed the right thing to say. This may actually account for why there is no record of the 'phone call because the officer may have taken the view that the call itself (not being a written notification) was of no great significance and that as the Appellant was being told to confirm the request in writing, doubtless he would do this and the letter would then become the operate document.
23. We cannot prove that the Appellant wrote the letter that he asserts that he wrote but we accept his evidence that he did. Since we accept that the 'phone call was made and that any officer would have been likely to say that the Appellant should confirm the request in writing, we accept the evidence of a seemingly honest witness that he did write the letter. In the turmoil in which the Appellant obviously found himself, and in the light of his totally non-business-like approach to his whole activity we find the evidence about the handwritten letter entirely credible. Equally we find it perfectly possible that the letter was sent to an inappropriate HMRC VAT office and for all we know the content of the letter might even have slightly confused the person who we assume opened the letter.
24. HMRC placed considerable emphasis on the fact that many of the points and admissions made by the Appellant, made well after the alleged date when he claimed to have deregistered, suggested that he knew that he was still liable for VAT. For instance he sought to file the figures for later trading periods but referred to the fact that papers had been lost in a break-in, and most curiously of all, in one questionnaire indicated that he added VAT to all customers' bills. Since it was impossible to reconcile all these later admissions with the proposition that the Appellant had deregistered, this had to cast great doubt on the Appellant's claim.
25. The first observation that we made at the hearing on this clear inconsistency was that all the later statements were quite as confusing and inconsistent, should the Appellant have thought that he automatically ceased to be liable for VAT once his turnover fell below the compulsory threshold as they would be had he believed that he had successfully deregistered. We certainly do not think that the Appellant thought that he was actually still liable for VAT, but that having filed the first return and defaulted, he could just cease to trouble to file another VAT return. In our view, the Appellant thought that he had not the slightest possibility of being liable for VAT when he completed the subsequent questionnaire and answered various further questions from HMRC. He may have thought that most of the questions were geared simply to confirming that he was indeed below the compulsory registration level. He claimed before us that he simply made a mistake when he specifically confirmed that he added VAT to all customers' bills. We found this particular answer given in the questionnaire particularly curious because we found the Appellant's summary of the initial pricing of meals to be rather convincing. The Appellant had said that he had been asked by his accountant whether he had priced menus so as to cover his liability for VAT. He apparently said that he had not done so but that until he reprinted menus, he would leave the prices as that had been fixed in an effort to encourage people to use the restaurant and simply pay the VAT out of the existing stated prices. How thus the Appellant confirmed that he later added on VAT when on any test he thought that he was not liable for VAT we find difficult to answer in any logical way.
26. The Appellant struck us as being not only honest, but totally bemused by business and what he should be doing in relation to VAT, and he also struck us as someone who wanted to be thought to be doing the right thing. It may sound curious but we actually account for the Appellant's various later strange filings and replies as resulting from a combination of being completely out of his depth and from wanting to give people the replies that he thought they wanted and expected. Whether that be right or not, we still say that the Appellant's later conduct was no more consistent with the only other conceivable expectation on the part of the Appellant (namely that he thought that he had automatically dropped out of liability for VAT) than that he was clear that he had deregistered.
27. For these various reasons we accept the Appellant's evidence and allow his appeal.
28. We add one final comment. Counsel for the Respondents confirmed that we should allow the appeal if we accepted the Appellant's evidence, but it does occur to us to mention that for a trader to be deregistered, HMRC has to confirm the trader's claim that he ceases to be liable to be registered, and then de-registration can be effective as of the date of the giving of the notice. Since in this case HMRC has never confirmed that the trader's claim to be deregistered was accepted, we need to account for how the trader actually ceased to be liable for VAT at some time in 2004. It seems to us that this is explained either by the fact that deregistration can be inferred simply from the supposition that HMRC lost the relevant notice, or rather more credibly can be based on the proposition that the notice was given in mid-2004; HMRC now confirm that they accept its validity (in terms of level of turnover); whereupon the deregistration can still be effective as of the date when the notice is assumed to have been given. That seems to us to be cogent and to satisfy the requirements for deregistration being effective from the 2004 date. We should perhaps finally add that we were not called upon to indicate the precise date when the Appellant actually gave the relevant notice, but we assume that this can easily be agreed between the parties.

HOWARD M NOWLAN

CHAIRMAN

RELEASED: 26 November 2007

LON 2006/1399