Middleton (t/a Freshfields) v Revenue & Customs [2011] UKFTT 316 (TC)

FTT-Tax
Middleton (t/a Freshfields) v Revenue & Customs
[2011] UKFTT 316 (TC) · 2011-05-12
1. The Appellant (“IJM”) appeals against the decision of HMRC to refuse to backdate the effective date of her registration for VAT from 1 August 2008 to an earlier (but unspecified) date.2. IJM is a sole proprietor trading in the name of Freshfields as a property and investment business. She applied to be registered for VAT on 28 July 2008 and asked that her registration be effective from 1 August of that year.3. In November 2008 IJM submitted a claim for VAT incurred on certain goods and services provided during the construction of two houses in the sum of £35,829. By letter of 22 December 2008 HMRC told her that she would not be able to claim VAT on supplies of services more than six months prior to registration and accordingly her repayment claim should be reduced to £23,185.4. IJM subsequently asked for her effective registration date to be backdated so that she could reclaim input tax incurred from 2005. By a decision of 21 January 2009 HMRC refused her application. That decision was upheld following subsequent reviews.Why was 1 August 2008 entered as the preferred registration date in IJM’s Application for Registration?6. IJM’s case is that the entry of 1 August 2008 as the requested registration date had been a mistake. It had come about this way. She had created two dwellings on a property acquired by her in 2006. The intention had been for her to live in one and let out the others. The work done by the builders and had been charged to her net of VAT; the zero-rating had been supported by fortnightly certificates signed off by her quantity surveyor. IJM’s repayment claim related to costs of materials and works sourced and paid for by her. To recover VAT she had used a firm of accountants (C & Co). C & Co obtained a registration form (VAT 1) and C & Co had chosen 1 August 2008 as the registration date. IJM had signed this without reading the guidance notes; she had, she told us in evidence, left it all to C & Co.7. Why C & Co chose 1 August 2008 as the preferred registration date was explained in a letter of June 2008 to HMRC. They said they had been concerned to do everything possible to secure capital gains tax rather than income tax treatment on the property. At the time, they said, those considerations dictated 1 August 2008 as the right registration date; and that date, they said, would have been chosen even if they had known that HMRC would seek to argue that, consequently, some element of the VAT would not be recoverable.8. The individual working for C & Co had, IJM said, operated as a department of that firm; consequently their mistaken choice of 1 August 2008 had (IJM said) been a “departmental error”. For herself, said IJM, she would not have been concerned with the question of whether any proceeds of sale of the property were chargeable to income tax or capital gains tax because, by August 2008, the project had incurred a loss.

Legal principles and guidelines concerning applications for registration

9. The appeal concerns a person who was not liable to be registered but who voluntarily applied to be registered. The application form dated 27 July 2008 asked for prospective registration as from 1 August. VAT Act 1994 Schedule 1 paragraph 9(1) provides:
“9. Where a person who is not liable to be registered under this Act and is not already so registered satisfies the Commissioners that he … (b) is carrying on a business and intends to make such supplies in the course or furtherance of that business, they shall, if he so requests, register him with effect from the date on which the request is made or from such earlier date as may be agreed between them and him.”
The application was here made to “backdate” the registration. The notes to the VAT1 Form give the following explanation:
“13. Are you applying for voluntary registration?
You can apply for voluntary registration where your turnover does not go over the registration threshold, or where you intend to trade but your business has not started yet. Enter the date you would like to be registered from …… Important – the date you put here, once we have agreed, will be your registration date. You must account for output tax on all your taxable supplies from that date. Once a date is agreed, you cannot change your mind and ask us to alter your voluntary registration to a different date. We will only agree to change the date of registration in exceptional circumstances.”10. HMRC are prepared in certain cases to change an effective date of registration to an earlier date. There is no specific statutory provision for this; HMRC’s policy and guidance is, however, contained in Manual VI-28, Vol. 1: Registration. So far as relevant paragraph 8.8 states as follows:-
“8.8. Change EDR to an earlier date.
You may receive requests for registered traders to amend their EDR to an earlier date than that already allocated. Commonly this is where they belatedly find that input tax incurred prior to the EDR can’t be claimed as it is out of time.· In limited circumstances we may permit a retrospective change to the EDR if there has been a genuine error in completing the VAT1 by the person registering. Section 33 deals with the circumstances and procedures to follow.· Otherwise refuse requests of this nature. VAT Act 1994 Schedule 1 paragraphs 5 and 6 and paragraphs 9 and 10 … do not allow an EDR to be varied after a trader is registered. When the trader applied for registration he had the opportunity to negotiate his EDR then and the legislation does not allow this date to be changed retrospectively.”(There then followed three instances where an effective date of registration may be “corrected”).11. The circumstances and procedures to be followed when an officer is faced with an application to change an EDR are contained in section 33.1 of the Manual. Three of these are relevant to the present situation:

“33.1 Criteria for changing an EDR (trader requests)

· The EDR given must, at the time of registration, have been a backdated EDR, i.e. at the time of application the trader voluntarily applied for an earlier EDR.· The trader must demonstrate that there was a genuine misunderstanding or error in completing the application form. That does not include an error of judgment, e.g. he thought he would be in repayment but found in fact he was a repayment trader.· The request must be made before the due date of the first VAT return (i.e. one month after the end of the first period), which must not have been rendered.”Section 33.1.2 contains “additional criteria pushing EDR back”. One of these is that the new date must not be more than three years earlier than the current date. Section 33 concludes with a statement that cases where the criteria are not satisfied but an officer feels there may be mitigating circumstances (another cases) should be referred to head office for consideration.12. Here the appeal is against HMRC’s decision to refuse IJM’s application to change her effective date of registration from 1 August 2008 to an earlier date. The application is not against HMRC’s refusal to repay VAT incurred by her. But for completeness I mention that regulation 111 of the VAT Regulations 1995 sets out time limits for such claims for VAT incurred on supplies made to a taxable person prior to registration. So far as is relevant the claim is limited to VAT on supplies made within the three years prior to the date of registration.

The approach for the Tribunal

13. The amendment of a trader’s effective date of registration is, as noted, a matter for the discretion of HMRC. The Tribunal has on past occasions accepted jurisdiction as falling within section 83(a). There being no statutory provision (other than “care and management”) that applies as the foundation of HMRC’s assumed discretion, the Tribunal’s role must be “supervisory” rather than appellate. The Tribunal must therefore examine the circumstances and determine whether the decision in question was one that no reasonable decision-maker could have reached. I refer for example to Lead Asset Strategies (Liverpool) Ltd [2009] UK FTT 115 (a decision of Judge Berner). For that purpose we take the route prescribed in John Dee Ltd [1995] STC 941 , Court of Appeal. Hence, in deciding whether HMRC have rightly or wrongly exercised their discretion to refuse retrospective registration we have to consider whether they have acted in a way in which no reasonable panel of “commissioners” could have acted or whether they had taken into account some irrelevant matter or disregarded something to which they should have given weight. The Tribunal might also have to consider whether the commissioners had erred on a point of law. The Tribunal cannot exercise a fresh discretion or substitute its own decision. That is the statutory responsibility of the commissioners (HMRC).

Circumstances leading to the present dispute

14. I turn now to the circumstances that followed the original registration with effect from 1 August 2008.15. Following submission of the VAT1 Form, HMRC responded by sending IJM an additional questionnaire on which she confirmed that the expected date of her first taxable supplies would be September 2008. That is consistent with the indicated registration date.16. On 9 October 2008 IJM applied to file monthly returns. This was agreed. She rendered her first return on or about 13 November 2008; this was a repayment claim in the sum of £35,829.17. On 2 December IJM was asked to contact the repayment team to discuss her return after which she received a visit on 18 December. The visiting officer had understood from discussion IJM had had with another officer that the effective date of registration was now in doubt and that IJM wanted it backdated. No explanation had been given as to why 1 August 2008 had been chosen. The visiting officer advised IJM to apply for backdating.18. On 22 December 2008 HMRC wrote to IJM reducing her repayment claim to £28,185 due to VAT claimed as input tax on services supplied more than six months before 1 August 2008.19. C & Co then applied for IJM’s registration date to be backdated to 2005 as it “had been incorrectly recorded as 2008 on the original application”.20. HMRC responded explaining that there were only limited circumstances in which the date of registration cold be varied. IJM, through C & Co, sought a review of that decision on 25 March 2009.21. HMRC responded in May 2009 explaining that there were only limited circumstances where a voluntary date of registration could be amended. Those circumstances were the ones specified in paragraph 8.8 set out above. The same letter indicated that those conditions did not apply and there was no evidence of a genuine error. It was also noted that the request to backdate had been received after the date of IJM’s first return and that HMRC’s policy stated that requests must be made before that date.22. IJM wrote to HMRC on 10 June 2009 setting out details of the dates submitted on her VAT1 application. Following further letters, HMRC reiterated their refusal to backdate her application.

Conclusions

23. I accept that IJM had always expected to recover the VAT that she had incurred on the relevant supplies of goods and services used in the construction of the two dwellings. To that end she had registered for VAT. The date of 1 August 2008 had been deliberately entered in the application form (VAT1) as the intended registration date. IJM had the opportunity, which she did not take, of requesting that an earlier date be agreed. By the time she realised that “input tax” incurred by her prior to 1 August 2008 (by then the effective date of registration) could not be reclaimed, the only course open to her was to rely on paragraph 8.8 of the Policy and Guidance part of HMRC’s Manual and ask HMRC to exercise their published discretion and permit a retrospective change of the effective date of registration in her favour. This raises the critical question. Was the decision to refuse the request to permit a retrospective change a decision that HMRC could not reasonably have taken?24. HMRC have set out the criteria on which that decision is to be based and have acknowledged there could be other situations where mitigating circumstances are to be taken into account. I cannot fault the guidelines.25. The first of the relevant criteria is that IJM should have demonstrated “a genuine misunderstanding or error in completing the application form”. Apart from the making of typographic errors (which are not suggested here) there has been no evident genuine error in completing the VAT1 form with 1 August 2008 as the answer to the question – “From what date would you like to be registered?” A person seeking voluntary registration might, of course, have misunderstood the implications of choosing a prospective date rather than going for retrospective registration. Paragraph 9 above contains the notes to the Application Form that apply, as here, to a person requesting voluntary registration; these emphasise that, once an effective date of registration has been agreed, the person in question cannot have a change of mind and ask for a change of registration to an earlier date save “in exceptional circumstances”. IJM acknowledged she had not read the notes to the VAT1 Form. She had left that to C & Co.26. Reverting to John Dee , I cannot see that the decision to refuse the application to change the effective date of registration was a course that no reasonable panel of commissioners could have adopted. Moving to the next step in the John Dee exercise – did HMRC disregard something to which they should have given weight or taken into account some irrelevant matter? For this purpose the relevant considerations seemed to be as follows:(a) IJM was applying for voluntary registration and a clear inference must have been that this was to enable her to recover “input tax” incurred in the past.(b) The original effective date of registration had not been a backdated one.(c) IJM relied on her accountant and left the completion of the VAT1 Form and the consideration of the explanatory notes to C & Co.(d) C & Co had (rightly or wrongly) formed the view that direct tax considerations used 1 August 2008 preferable as the effective date of registration.(e) IJM signed the VAT1 Form in the genuinely mistaken belief that this would enable her to recover the VAT incurred in the past.27. Assuming HMRC had taken all those considerations into account, should their decision (to have refused to change the effective date of registration) have been different? I do not think so. It is reasonable to assume that the applicant for an effective date of registration, such as IJM, knew what she was doing. And where the applicant has left things to professional advisers, her position vis-à-vis HMRC is not changed in someway deserving of preferential treatment from HMRC. Also relevant is the first criteria in section 33.1 for permitting change to an effective date of registration; this criterion requires that the effective date of registration, when originally given, was a backdated one. That had not been the case here. Moreover, according to the third of the criteria in section 33, the request for a change must have been made before the due date of the first return. This also was not the case here; the first return was due by the end of November 2008 and a request for a change was made in early 2009.28. IJM sought to rely on a passage in paragraph 8.8 of the Policy Guidance part of the Manual. That prescribed circumstances where HMRC will “correct an EDR”. One of these is where there has been an element of departmental error with regard to the effective date of registration when the trader’s application was originally processed. IJM claims that the “departmental error” was that made by her accountants in choosing 1 August 2008. I do not accept that this is what “department error” means. The “department” is HMRC because HMRC carries out the processing of the application.29. For those reasons I cannot accept IJM’s case. She has not shown that the decision of HMRC was unreasonable. I therefore dismiss the appeal.30. This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. 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.

SIR STEPHEN OLIVER QC

TRIBUNAL JUDGE

RELEASE DATE: 12 May 2011

Cited in 3 later judgments