Hooper v Her Majesty's Revenue & Customs [2009] UKFTT 74 (TC)

FTT-Tax
Hooper v Her Majesty's Revenue & Customs
[2009] UKFTT 74 (TC) · 2009-04-24
[1]TC00042 Appeal number LON/2007/0094 VAT – Late registration – Whether a partnership existed between the appellants which the Commissioners could require to be registered – evidence that the appellants had represented to the Inland Revenue for income tax purposes that they were in partnership and that accounts had been drawn up on that basis – Found as a fact that a partnership existed and was not a sham even though motivated only by a wish to gain an income tax advantage – Appeal dismissed – Penalty for late registration further mitigated to a nominal amount (£50) FIRST-TIER TRIBUNAL TAX J.A. HOOPER and L.J. HOOPER Appellant - and - THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS (Value Added Tax) Respondents TRIBUNAL: JOHN WALTERS QC MICHAEL JAMES Sitting in public in Plymouth on 22 January 2009 B. Corbould for the Appellant J. Holl, Advocate, for the Respondents © CROWN COPYRIGHT 2009 DECISION This was an appeal by Mr. L.J. Hooper and Mrs. J.A. Hooper (who are husband and wife) against a review decision of the Respondent Commissioners ("HMRC") made on 19 September 2006 that a partnership of which Mr. and Mrs. Hooper were the partners was required to be registered for VAT purposes with effect from 1 October 1996 (this date was later revised to 1 February 1995, by a letter dated 15 February 2007). HMRC contend that this partnership operated the hairdressing businesses described as "Scissor Style 2" and "Scissor Style 3" ("SS2" and "SS3"). The review decision was made by Review Officer Richard Taylor.[2]Mr. and Mrs. Hooper also appeal against a civil penalty of £8,892 imposed on 15 January 2007. This penalty was not revised when the effective date of registration was revised, and the Tribunal was told that HMRC have no intention to do so.[3]Mr. and Mrs. Hooper, through Mr. Corbould, contend that they were never in partnership and that the takings from the SS2 and SS3 businesses ought to be viewed for VAT purposes as supplies made by Mrs. Hooper as a sole trader. Mrs. Hooper was registered for VAT as a sole trader in relation to a hairdressing business described as "Scissor Style 1" ("SS1") and this appeal raises no issues concerning the SS1 business.[4]There was a bundle of documents in evidence, and we heard oral evidence from Mrs. Hooper, Mr. Hooper and Officer Taylor. From the evidence we find the following facts.[5]Mrs. Hooper carried on a hairdressing business (SS1) in the Marchworth district of Southampton from 1986. She was registered for VAT in respect of that business until deregistration in 2004. The returns made under that registration included the takings of the SS1 business only, even after the SS2 and SS3 businesses had been acquired.[6]In 1988 Mrs. Hooper considered expanding her business. She took over a business in Shirley, Southampton, in a different district from Marchworth, where the SS1 business was carried on – though not far away. She took an assignment in her own name of the lease of the premises from where the Shirley business was being carried on. That business became SS2. The business bank account used for SS2 was in Mrs. Hooper's sole name at the beginning. She would spend 3 to 4 days a week working at Marchworth (SS1) and one day a week at Shirley (SS2), but every day she would go round to Shirley (SS2) to collect the takings.[7]In 1993 a new lease of the Shirley premises was taken which showed Mr. and Mrs. Hooper as lessees.[8]Also in 1993, Mrs. Hooper considered acquiring another hairdressing business in another part of Southampton (SS3). The business (SS3) was acquired.[9]By 1995 her accountant was a Mr. Snashall. In that year and on his advice, accounts began to be drawn up for SS2 (by Mr. Snashall) on the basis that the business was owned by Mr. and Mrs. Hooper in partnership. From that time the bank account was in the names of Mr. and Mrs. Hooper and both of them had authority to sign cheques on the account (as single signatories). Mr. Hooper, however, never signed any cheques on the account. There was no written partnership agreement.[10]For 1998 and succeeding years partnership tax returns were submitted to the Inland Revenue by Mr. and Mrs. Hooper, stating that they were in partnership carrying on the SS2 business. The 1998 and 1999 returns show that Mr. and Mrs. Hooper shared the profits of the business equally. The 2000 return shows that Mrs. Hooper took all the profit except for £4 which was allocated to Mr. Hooper.[11]Mr. Hooper was at all material times unemployed and we find that Mr. Snashall advised Mr. and Mrs. Hooper to declare the profits of the SS2 business as partnership profits so that Mr. Hooper's income tax allowances could be utilised.[12]On 10 November 1999, Mrs. Hooper signed a completed questionnaire in answer to a registration enquiry made by HM Customs & Excise. She stated that SS2 was run by her in partnership with Mr. Hooper and that she also had an involvement in SS1 and SS3.[13]The reason why SS2 and SS3 were not registered for VAT was that Mr. Snashall considered that separately each business was not trading above the VAT threshold.[14]On 24 November 2000 a contract giving right of occupation of a bed-sittingroom at the Shirley premises was entered into with L.B. Duffy and K. Dugdale. These persons were described in the contract as caretakers in the employment of Mr. and Mrs. Hooper. However Mrs. Hooper signed the contract both for herself and (apparently) for Mr. Hooper.[15]For the financial year 2004/05 the Southampton City Council rates demand relating to the premises where the SS3 business was carried on (92 Kendal Avenue) was addressed to Mr. and Mrs. Hooper. Mrs. Hooper explained that the lease of these premises was to Mrs. Hooper on her own and the rates demand was addressed to both of them because the bank account out of which direct debits for the rates were paid was in joint names.[16]Enquiries undertaken by HMRC resulted in Mr. and Mrs. Hooper being compulsorily registered for VAT as a partnership in respect of both the SS2 and the SS3 business. The compulsory registration took place in July 2005 with effect from 1 October 1996 (later amended as stated above).[17]A belated notification penalty of 15% of the net tax liability for the period from 1 October 1996 to 30 June 2004 was imposed.[18]Officer Taylor raised an assessment for a "long period" from 1 October 1996 to 31 August 2005 of VAT in the net amount of £82,221 and there was a further £2,175 assessed for the period from 1 September 2005 to 30 November 2005.[19]In 2005, again on Mr. Snashall's advice as "a precautionary measure", the SS3 business began to be carried on by a company "Scissor Style 3 Ltd", whose turnover was beneath the VAT threshold. This arrangement lasted for less than a year and was discontinued on the advice of new accountants retained by Mrs. Hooper.[20]Mr. Hooper's evidence was that he never took any profit out of the business and we are satisfied that he never regarded any of the profits of the business as his own, as distinct from family moneys shared with Mrs. Hooper. He never took part in any of the hairdressing activities carried on by any of the businesses. The most he did in terms of work was various odd jobs in the way of maintenance as and when requested to do so. We are satisfied that this work was done as a favour to Mrs. Hooper.[21]Officer Taylor explained that the full late registration at 15% would have amounted to £12,704.23, but that he had allowed 30% mitigation, to reduce the penalty to £8,892.[22]Officer Taylor pointed out that the turnover of SS2 while the business was in Mrs. Hooper's ownership, but before the partnership between Mr. and Mrs. Hooper became effective in relation to it, the period between 1988 and 1995, would effectively escape VAT on any basis because no relative assessment had been raised.[23]Mr. Corbould's submission was that there was no partnership between Mr. and Mrs. Hooper in fact because they never intended to trade together with a view to profit (and they never in fact did so). The arrangement was a sham put forward to achieve an income tax mitigation and should not be regarded as having any effect for VAT purposes. The partnership was set up with a tax avoidance motive, not a profit motive.[24]Although Mr. and Mrs. Hooper's direct tax affairs continued to be dealt with on the basis of the partnership, Mr. Corbould told us that if this Tribunal decides the issue in favour of Mr. and Mrs. Hooper, then their advisers would contact HMRC to regularise the direct tax position.[25]Mr. Corbould also submitted that if we were against Mr. and Mrs. Hooper on the main (partnership) issue, then we should mitigate the penalty further to recognise their cooperation in the enquiry.[26]Mr. Holl, for HMRC, submitted that in fact and in law there was a partnership between Mr. and Mrs. Hooper. He contended that in so far as Mr. Hooper obtained a tax benefit from the arrangement, that was a gain to him derived from the partnership. He referred to s.14 Partnership Act 1890 and submitted that Mr. and Mrs. Hooper had "held themselves out" as partners and therefore were to be regarded as liable as such.[27]He referred to Ognall J's decision in Burrell (trading as The Firm) v Commissioners of Customs and Excise [1997] STC 1413, where he said:
"It is the case that, as is common ground between the parties here, the absence of a formal partnership agreement, for example, is not and cannot be definitive of the existence of a partnership. It is also correct to say that it is unnecessary for each partner to take an active role in the running of the business and there is no formal requirement under the Partnership Act 1890 that each partner needs to be identified on the documents emanating from the partnership. All those are trite matters of law."
[28]In the Tribunal's view, the question of whether there was a partnership between Mr. and Mrs. Hooper in relation to the SS2 and SS3 businesses must be decided by reference to our assessment of the substance and reality of the relationship between them.[29]We start with the well known definition of "partnership" in section 1, Partnership Act 1890: "Partnership is the relation which subsists between persons carrying on a business in common with a view of profit".[30]Once it is recognised that, as Ognall J said in Burrell , it is unnecessary in a partnership for each partner to take an active role in the running of the business – and therefore that the common phenomenon of a "sleeping partner" is nonetheless a partner in law – it can be seen that the essence of the partnership relationship is not common activity in the gaining of profits (although there must, of course, be a partnership business). It is, instead, the common ownership of the business and of any profits to which it gives rise (and, generally, liability for losses).[31]The partnership tax returns for 1998 and succeeding years, signed by Mr. and Mrs. Hooper and showing a sharing of profits between them are, in our view, determinative evidence of the existence of a partnership relation between Mr. and Mrs. Hooper in those years.[32]In the light of the other evidence we find that that partnership commenced in 1995, when accounts started to be drawn up for the partnership.[33]The details of the ownership of the SS2 and SS3 businesses are matters entirely within the knowledge and control of Mrs. Hooper, and of Mr. Hooper when Mrs. Hooper admitted him into partnership with her. The fact that Mr. Hooper never regarded any of the profits of the business as his own, as distinct from family moneys shared with Mrs. Hooper, does not detract from the fact that Mr. and Mrs. Hooper decided to share the SS2 and SS3 businesses, and their profits (and losses) for income tax purposes, and, if for income tax purposes, then generally.[34]In the Tribunal's view it would be wholly wrong to hold, where Mr. and Mrs. Hooper have represented to HMRC that they were partners for income tax purposes (in circumstances where it was within their knowledge and control to determine the issue according to their wishes and interests), that nevertheless the partnership should be disregarded on Mr. and Mrs. Hooper approaching the Tribunal to say that the arrangement was only to save income tax and should not count against them for VAT purposes.[35]We hold that the partnership was not a sham. It was an arrangement having legal effect which was entered into (albeit without a written partnership agreement, which is not wholly surprising in a case of husband and wife) on advice, for commercial (income tax) reasons. It appears that the advice was not good. That is not a matter which should concern HMRC who must administer VAT by reference to the facts, including legal arrangements, as they find them.[36]We therefore dismiss Mr. and Mrs. Hooper's appeal against the decision that the partnership was required to be registered. Since there seems to be no dispute about the date of effective registration (on the basis that the partnership was required to be registered) or quantum of tax assessed, the assessments must stand.[37]We turn now to the late registration penalty. Mr. Holl in his submissions was prepared, on HMRC's behalf, to take a very generous attitude to the question of further mitigation of the penalty if we were to decide (as we have done) the registration issue in HMRC's favour. He said that in that case he had no problem with the Tribunal deciding on a notional amount of penalty payable. He resisted our reducing the penalty to nil, because he said that would be tantamount to accepting that Mr. and Mrs. Hooper had a reasonable excuse for the late registration, which he said they had not.[38]He drew the Tribunal's attention to section 71(1)(b) VAT Act 1994 which provides that reliance on any other person to perform a task, or the dilatoriness or inaccuracy of such a person relied upon cannot count as a reasonable excuse. He submitted that Mr. and Mrs. Hooper were, in effect, praying in aid their reliance on Mr. Snashall's advice as a reasonable excuse for late registration.[39]We consider that section 71(1)(b) is not apt to cover the case where a taxable person relies on another person for tax advice rather than for the performance of any task, as such. The reference to "any task" in section 71(1)(b) seems to us to indicate that the draughtsman had in mind clerical duties in particular, such as the completion and submission of returns.[40]However that may be, it seems to the Tribunal that a mitigation of the penalty to zero is not called for by the circumstances. We will, on the grounds of Mr. and Mrs. Hooper's cooperation, reduce the penalty from £8,892 to £25, in the exercise of our power under section 70 VAT Act 1994. JOHN WALTERS QC TRIBUNAL JUDGE RELEASE DATE: 24 April 2009