[2009] UKFTT 234 (TC)

TC00183

Appeal no: LON/2008/1055

VAT – penalty for failure to notify liability to register – reasonable excuse – reliance on third party – mitigation – penalty reduced

FIRST-TIER TRIBUNAL

TAX

ALH INTERIORS LIMITED Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY’S

REVENUE AND CUSTOMS (VAT) Respondents

TRIBUNAL: ROGER BERNER (Judge) (Chair)

MRS R A WATTS DAVIES

MHCIMA FCIPD (Member)

Sitting in public in London on 24 June 2009

The Appellant did not appear and was not represented

Christiaan Zwart instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

DECISION

1. ALH Interiors Limited (“ALH”) appeals against the decision of HMRC dated 10 March 2008 to refuse further mitigation of a penalty of £3,075 notified to ALH on 12 February 2008 in respect of the failure by ALH to notify HMRC of its liability to be registered for VAT within the prescribed period.

2. Subsequent to ALH’s notice of appeal, the penalty was recalculated. The penalty at issue in this appeal now stands at £2,515.

3. The Appellant did not appear and was not represented. Mr Anthony Hallam, a director of ALH, was contacted by the Tribunal by telephone at the appointed time for the hearing (10.30 am) and claimed that he was not aware of the Tribunal’s letter to him dated 10 March 2008 giving ALH notice of the hearing of the appeal. However, he informed the Tribunal that he was content for the hearing to proceed in his absence. In accordance with rule 33, The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 the Tribunal considered that it was satisfied that reasonable steps had been taken to notify ALH of the hearing and that, having regard to the fact that a previous hearing on 8 October 2008 had been adjourned due to the absence of the Appellant, it was in the interests of justice to proceed with the hearing.

4. Mr Christiaan Zwart of Counsel appeared for HMRC and HMRC provided us with a bundle of documents.

The Facts

5. We heard no oral evidence. We find the following facts from the documents before us:

(1) ALH is a company incorporated on 30 May 2006. It is engaged in the building trade, specifically in relation to joinery installation.

(2) According to ALH’s grounds of appeal, “…within month 3 of trading [the] company turnover was £80,000.” It is not disputed that by the end of August 2006 the value of ALH’s taxable supplies since its incorporation had exceeded the then one year turnover threshold for registration of £59,000.

(3) On 1 June 2006 a Form VAT1 in respect of an application to register ALH for VAT was sent to HMRC under cover of a letter from CAS, Chartered Accountants. The Form VAT1 was signed by Mr Anthony Leonard Hallam as director of ALH and was dated 1 June 2006. That application was for voluntary registration.

(4) On 14 June 2006 HMRC issued to ALH directly a Request for Information, which ALH completed and returned to HMRC who received it on 6 July 2006. The form was signed by Mr Hallam and dated 4 July 2006.

(5) A further request for information was made by HMRC, addressed to ALH, on 15 August 2006. This sought information regarding PAYE, employer’s liability insurance and employees.

(6) There is no evidence of any reply having been received by HMRC to the August 2006 request. On 27 September 2006 HMRC wrote to ALH advising the company that for the time being it would not be registered for VAT, and informing ALH of the requirement to notify HMRC if the registration limits (briefly set out in the letter) were exceeded. The risk of a penalty for failure to notify was also set out.

(7) This was followed up by an Advice of Non-Registration dated 3 October 2006 and sent by HMRC to ALH stating that the registration process had been discontinued because the additional information requested in August had not been received. This Advice also contained information about the need to notify liability to register and the penalty consequences of failure to do so.

(8) On 2 July 2007 an online eVAT registration application was filed on behalf of ALH by Alison Robinson of AIMS Accountants for Business. This specified that ALH’s taxable supplies exceeded the registration limit on 1 August 2006.

(9) At almost the same time as the eVAT application was made, but one day later on 3 July 2007 (according to the date stamp), HMRC received a further, this time paper, application for VAT registration (Form VAT1) filed on behalf of ALH by Peter Collins of Soane Collins Limited. Mr Collins’ letter was dated 30 April 2007, but the form, which had again been signed by Mr Hallam, was undated.

(10) ALH was registered for VAT with an effective date of registration (“EDR”) of 1 August 2008, but it was subsequently accepted by HMRC that the correct EDR should have been 1 October 2006. Notwithstanding this, by agreement between HMRC and ALH, the original EDR of 1 August 2006 has been retained.

(11) On 9 November 2007 HMRC wrote to ALH informing it that failure to notify the liability to register at the proper time had rendered ALH liable to a penalty under s 67(1), Value Added Tax Act 1994 (“VATA”) at a rate of 10% of the net tax liability for the period from 1 August 2006 to 1 July 2007. ALH was requested in that letter to notify HMRC of its net tax liability for this period, in order that this could be used to calculate the penalty.

(12) On 12 February 2008 Notice of Assessment of Civil Penalty was issued by HMRC to ALH. This showed a total penalty of £3,075, calculated at 10% for a period of 335 days from 1 August 2006 to 1 July 2007 on net tax for the period of £41,008.45, and mitigation for subsequent voluntary registration by 25%. The net tax figure was estimated by HMRC on the basis of ALH’s declared turnover of £300,000, as entered on the eVAT application, which had formed the basis for the registration of ALH.

(13) On 10 March 2008 HMRC wrote to ALH to advise that in its view there were no grounds for further mitigation of the penalty. It is from that decision that ALH has appealed. The letter also refers to the possibility that the start date for the penalty period should be regarded as from 1 October 2006 (rather than 1 August 2006), thus reducing the penalty. At the hearing, as described above, HMRC confirmed this, and that the penalty should accordingly be reduced to £2,515.

The Law

6. We set out below the relevant provisions of the VATA.

(1) Para 1(1)(a), Sch 1 provided at the material time as follows:

(1) … a person who makes taxable supplies but is not registered under this Act becomes liable to be registered under this Schedule-

(a) at the end of any month, if the value of his taxable supplies in the period of one year then ending has exceeded [£59,000]

(2) Para 5, Sch 1 provides:

(1) A person who becomes liable to be registered by virtue of paragraph 1(1)(a) above shall notify the Commissioners of the liability within 30 days of the end of the relevant month.

(2) The Commissioners shall register any such person (whether or not he so notifies them) with effect from the end of the month following the relevant month or from such earlier date as may be agreed between them and him.

(3) In this paragraph “the relevant month”, in relation to a person who becomes liable to be registered by virtue of paragraph 1(1)(a) above, means the month at the end of which he becomes liable to be so registered.

(3) Section 67 contains provisions regarding failure to notify liability to register:

(1) In any case where-

(a) a person fails to comply with any of paragraphs 5 … of Schedule 1 …

he shall be liable, subject to subsections (8) … below, to a penalty equal to the specified percentage of the relevant VAT or, if it is greater or the circumstances are such that there is no relevant VAT, to a penalty of £50.

(3) In subsection (1) above “relevant VAT” means …-

(a) in relation to a person’s failure to comply with paragraph 5 … of Schedule 1, … the VAT (if any) for which he is liable for the period beginning on the date with effect from which he is, in accordance with that paragraph, required to be registered and ending on the date on which the Commissioners received notification of, or otherwise became fully aware of, his liability to be registered …

(4) For the purposes of subsection (1) above the specified percentage is-

5 per cent where the relevant VAT is given by subsection 3(a) … above and the period referred to in that paragraph does not exceed 9 months …

(b) 10 per cent where that VAT is given by subsection (3)(a) … above and the period so referred to exceeds 9 months but does not exceed 18 months …

(8) Conduct falling within subsection (1) above shall not give rise to liability to a penalty under this section if the person concerned satisfies the Commissioners or, on appeal, a tribunal that there is a reasonable excuse for his conduct.

(4) Section 71(1) restricts the defence of reasonable excuse under s 67(8) in certain cases. So far as material to this appeal it provides:

(1) For the purpose of any provision of sections 59 to 70 which refers to a reasonable excuse for any conduct-

…

(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.

(5) Section 70 provides for mitigation of a penalty under s 67:

(1) Where a person is liable to a penalty under section … 67 … the Commissioners or, on appeal, a tribunal may reduce the penalty to such amount (including nil) as they think proper.

(2) In the case of a penalty reduced by the Commissioners under subsection (1) above, a tribunal, on an appeal relating to the penalty, may cancel the whole or any part of the reduction made by the Commissioners.

(3) None of the matters specified in subsection (4) below shall be matters which the Commissioners or any tribunal shall be entitled to take into account in exercising their powers under this section.

(4) Those matters are-

(a) the insufficiency of the funds available to any person for paying any VAT due or for paying the amount of the penalty;

(b) the fact that there has, in the case in question or in that case taken with any other cases, been no or no significant loss of VAT;

(6) Section 76 provides for assessments of amounts due by way of penalty, as follows:

(1) Where any person is liable-

…

(b) to a penalty under any of sections 60 to 69B …

the Commissioners may … assess the amount due by way of penalty … and notify it to him accordingly; and the fact that any conduct giving rise to a penalty under any of sections 60 to 69B … may have ceased before an assessment is made under this section shall not affect the power of the Commissioners to make such an assessment.

Discussion

7. We are satisfied on the evidence before us that:

(1) By virtue of para 1(1)(a), Sch 1, VATA, ALH became liable to be registered for VAT on 31 August 2006.

(2) August 2006 was accordingly the “relevant month” for the purpose of para 5, Sch 1.

(3) ALH was obliged to notify HMRC of its liability to be registered within 30 days of 31 August 2006. It failed to do so. Its application for voluntary registration made on 1 June 2006 is not relevant for this purpose.

(4) ALH was, in accordance with para 5(2), Sch 1, required to be registered from 1 October 2006.

(5) The penalty under s 67, subject to mitigation and any defence of reasonable excuse, is properly assessed at 10% of the “relevant VAT” for the period 1 October 2006 to 1 July 2007 inclusive, the receipt by HMRC of notification of the liability of ALH to be registered having first been received by HMRC on 2 July 2007.

(6) HMRC have properly used their powers of assessment under s 76 in calculating the relevant VAT by reference to ALH’s declared turnover in the eVAT registration application, in the absence of any other evidence provided by ALH.

8. It remains to consider the questions of reasonable excuse and mitigation.

Reasonable excuse

9. ALH having not appeared or been represented before us we can refer only to the grounds of appeal set out in ALH’s appeal notice, and certain correspondence with HMRC.

10. The grounds of appeal recite that, shortly after ALH commenced trading, it appointed a new accountant, Peter Collins of Soane Collins Limited, as its agent for tax matters and to provide bookkeeping services. Mr Collins replaced CAS, Chartered Accountants, who had dealt with the setting up of ALH. Within three months of trading it is said that Mr Collins advised that the company should be registered for VAT. Mr Hallam signed the VAT registration form in order that Mr Collins could deal with the registration on behalf of ALH. ALH says that it heard nothing further in the next few months, and contacted Mr Collins on a number of occasions to enquire what was happening. Mr Collins is said to have put the delay down to HMRC pressure of work. Thereafter, Mr Hallam contacted Alison Peterson of Accountants for Business who then effected the registration. It was, so the grounds of appeal assert, discovered at that time that Mr Collins had not filed certain official documents on behalf of ALH. ALH dispensed with the services of Mr Collins and re-engaged CAS.

11. The essence of ALH’s appeal is that:

(1) it relied upon Mr Collins to effect the VAT registration, and he failed to do so;

(2) all outstanding VAT has been paid; and

(3) ALH has done everything in its power to resolve the problems that have been created by Mr Collins’ alleged failure to register it for VAT.

12. There is no reference in the grounds of appeal to the application to register voluntarily on 1 June 2006 that was filed on behalf of ALH by CAS, nor to the engagement in that registration process of ALH itself. It is not clear whether Mr Collins had in fact been engaged by August 2006, and therefore whether ALH was indeed relying on Mr Collins at the relevant time. Alison Peterson was evidently not engaged until around June 2007; the grounds of appeal state that “within one month of giving Alison permission to act as my official agent, my company was VAT registered”. There is thus a considerable period during which it is asserted that Mr Collins had been instructed and had failed to effect the registration.

13. While it seems clear from the documents we have seen that at some time in the process ALH instructed Mr Collins, we are not satisfied on the evidence before us that at the time when ALH became liable to be registered ALH was relying on Mr Collins. A further request for information in respect of the original registration application had been sent by HMRC to ALH on 15 August 2006. It would have been reasonable for ALH to continue to pursue that application; and we find that it was unreasonable for it not to have done so.

14. Even if we had been satisfied that ALH had relied upon Mr Collins at the relevant time, this could not have constituted a reasonable excuse having regard to s 71(1)(b) VATA. The dilatoriness of another person is not a reasonable excuse, and the position could not have been altered by any assurance given by Mr Collins that the application had in fact been made (see Customs & Excise Commissioners v Harris and another [1989] STC 907).

Mitigation

15. HMRC has mitigated the penalty by 25%. The Tribunal has power under s 70 to reduce the penalty to such amount (including nil) as it thinks proper. It also has the power to cancel the whole or any part of the reduction made by HMRC.

16. On the basis of the facts we have established, these show that whilst ALH was to an extent the author of its own misfortune in not following through with the original registration process and not being as diligent as it could have been in instructing and making enquiries of its adviser, part of the fault seems clearly to have lain with an adviser. We have in mind particularly the fact that Mr Collins’ letter accompanying Form VAT1 was dated 30 April 2007, but was not received by HMRC until 3 July 2007. We infer from this that Mr Collins was responsible for delay, and that this application could have been made by him on behalf of ALH several, and perhaps many, weeks earlier.

17. Whilst ALH’s reliance on a third party cannot constitute a reasonable excuse so as to exclude liability to the penalty altogether, we consider that in the circumstances of this case this delay by a third party on whom ALH relied is a factor that can be, and ought to be, taken into account in mitigation of the penalty. It is not a factor precluded from being taken into account by s 70(4): we expressly do not take into account factors raised by the grounds of appeal that there has been no loss of VAT and that ALH and Mr Hallam have acted in good faith. But we regard it as significant that the revised period for calculation of the relevant VAT exceeds nine months by just one day, and that accordingly if Mr Collins’ letter and the Form VAT1 had been received but one day earlier the rate of the penalty would have been reduced from 10% to 5%. The effect of that single day (ignoring any effect on the calculation of the relevant VAT) is to increase the penalty, after the 25% mitigation, from £1,257 to £2,515. We ignore any adjustment to the relevant VAT because we consider that the element of VAT in the calculation of the penalty should properly reflect the whole of the period between the date when ALH was required to be registered and the actual date of notification, but that in these circumstances it would be right to mitigate the effect of increasing the rate of the penalty applied to that amount of VAT. On this basis, taking into account ALH’s own failures, we consider that it would be just and proper to mitigate the penalty further so as to reduce this differential by half. This results in a revised penalty of £1,886.

Decision

18. Accordingly, we reduce the penalty to £1,886 and allow the appeal to that extent. Otherwise we dismiss the appeal.

The hearing having taken place in the absence of the Appellant, the Appellant has a right to apply for this decision to be set aside pursuant to Rule 38 of The Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009 (“the Rules”).

Each of the Appellant and the Respondents have 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.

First-tier Tribunal (Tax)