Paul Baldwin T/A Baldwin Motor Services v Revenue and Customs (VALUE ADDED TAX - penalty for failure to register for VAT) [2021] UKFTT 15 (TC)

FTT-Tax
Paul Baldwin T/A Baldwin Motor Services v Revenue and Customs (VALUE ADDED TAX - penalty for failure to register for VAT)
[2021] UKFTT 15 (TC) · 2020-11-25
The hearing took place on 22 October and 25 November 2020. The form of the hearing was a video hearing using the Tribunal Video Platform. A face-to-face hearing was not held because of the COVID-19 pandemic. Prior notice of the hearing had been published on the gov.uk website, with information about how representatives of the media or members of the public could apply to join the hearing remotely in order to observe the proceedings. The hearing was, therefore, held in public.

Mr John Bramley, JM Bramley Accountants, for the Appellant

Mr Christopher Thompson-Jones, litigator of HM Revenue and Customs’ Solicitor’s Office, for the Respondents

DECISION

Introduction

1. Mr Baldwin carried on a small garage business in Mansfield, Nottinghamshire. HMRC decided that Mr Baldwin was liable to be registered for VAT between 1 September 2013 and 1 February 2018. HMRC assessed Mr Baldwin to VAT in the amount of £60,813.83 and that assessment has not been appealed. HMRC also assessed Mr Baldwin to a penalty under Schedule 41 to the Finance Act 2008 (“FA 2008”) for the non-deliberate failure to notify his liability to be registered for VAT in the sum of £24,578.40. Because the amount of the assessment to VAT was reduced to £60,813.83 from a higher figure, HMRC have requested that this Tribunal reduce the penalty issued to £17,331.94. Mr Baldwin now appeals to this Tribunal against the penalty.2. Originally, the hearing was set down for one day on 22 October 2020. The hearing was adjourned part-heard because, in part, time was lost due to a fire alarm occurring at the premises of HMRC. In the event, the hearing was resumed on 25 November 2020 and lasted for a full day.

The evidence

3. The evidence before the Tribunal consisted of a Document Bundle (167 pages) prepared by HMRC and a Calculations, Analysis and Bank Statement Bundle (280 pages). The relevant HMRC officer, Ms Claire Verhoeven, produced a witness statement and was cross-examined.4. At the hearing on 25 November 2020, Mr Bramley sought to admit additional documents into evidence. After hearing submissions from Mr Thompson-Jones and Mr Bramley, we admitted a schedule of alleged errors in relation to Ms Verhoeven’s calculations (together with a bank paying in slip) and a letter dated 6 February 2019 from Mr Baldwin’s accountants, JM Bramley Accountants, to HMRC relating to a voluntary disclosure and a sample of invoices. Mr Thompson-Jones, appearing for HMRC, did not object to the admission of these documents.

The law

6. A person who is registered or liable to be registered is a taxable person (section 1 VATA). VAT is charged on supplies made by a taxable person and is a liability of that person (section 4 VATA). A taxable person is required to make VAT returns. If he or she does not do so HMRC may then assess the VAT due to the best of their judgement (section 73 VATA).8. Paragraph 1(3) VATA provides:
“A person does not become liable to be registered by virtue of sub-paragraph (1)(a) or (2)(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 £83,000.”

Scope of the appeal

9. As HMRC submitted, there can be no appeal against the assessment to VAT raised against Mr Baldwin because section 83(1)(j) VATA only allows an appeal against an assessment where the taxpayer has made a return under that Act. It was common ground that Mr Baldwin had not made a return and, therefore, this Tribunal has no jurisdiction to hear an appeal against the assessment.10. Therefore, the issues in this appeal are:(1) whether Mr Baldwin made taxable supplies exceeding the VAT threshold in the relevant years and therefore should have registered for VAT;(2) whether HMRC correctly assessed and notified Mr Baldwin of his liability to a penalty; and(3) whether Mr Baldwin had a reasonable excuse for his failure to register for VAT.11. As regards (3) above, Mr Baldwin’s case was that his turnover did not exceed the threshold in any of the relevant years. He did not base his case on the ground that he had a reasonable excuse for his failure to register. It was clear that Mr Baldwin suffered from ill-health but there was no specific evidence demonstrating how this prevented him from fulfilling any VAT obligations he may have had.

The facts

12. As already indicated, Mr Baldwin carried on a small garage business. He was a self-employed sole proprietor. The garage provided carried out repairs to cars, servicing of vehicles and MOTs. After a lengthy period of ill-health, Mr Baldwin decided to cease trading in February 2018.13. In August 2017, Ms Verhoeven and a colleague paid an unannounced visit to Mr Baldwin’s business premises. Mr Baldwin explained that he had been trading for 12 years and that he ran the business himself with the assistance of a trainee called Ben. Ben had been working for Mr Baldwin for approximately four years.14. Mr Baldwin explained to the HMRC officers that he had bought another property, an industrial unit at Toothill Lane in Mansfield, and that he received rental income (which was not liable to VAT) from the property. The Toothill Lane property cost Mr Baldwin £70,000. He funded the acquisition with a loan from HSBC of approximately £14,000 and the balance was paid by cashing in ISAs (£28,000) and other savings (which included an inheritance from his aunt of £17,000). The monthly rental that Mr Baldwin received was approximately £600.15. Mr Baldwin thought that the annual turnover of his garage business was approximately £60,000 to £80,000 per annum. He confirmed that he was up to date on his self-assessment income tax returns and that his accountant prepared his returns and told him what to pay. He confirmed that he was not registered for VAT and that the situation was monitored by his accountant.16. Apart from the Toothill Lane property, Mr Baldwin said that he owned his house in Mansfield (which was given to him by his mother) and a property in Germany. This latter property had been his grandmother’s house and he had bought it for approximately €40,000 in December 2007. The purchase was funded by a loan of £27,864 from HSBC, using Mr Baldwin’s home as security. Mr Baldwin had recently been divorced and the matrimonial home was transferred to his wife as part of the divorce settlement. Mr Baldwin had, in addition, bought a van in 2015 for £15,500.17. HMRC considered that the purchase of these properties as evidence of suppression of cash takings by Mr Baldwin. We were not satisfied, however, that HMRC had sufficiently investigated these purchases to be able to sustain that allegation.18. In 2010, Mr Baldwin took on an assistant called Ben. Ben was, at that time, aged 14 and subsequently went to a local technical college. Ben worked for Mr Baldwin as an apprentice on a work experience scheme, starting in 2014, and Mr Baldwin received £1,500 in April 2017 [1] from the college for giving Ben work experience. Ben’s remuneration first appears in the business bank statements in October 2014. Mr Baldwin said that for the first few years Ben had been learning and had been of limited assistance, but he hoped that Ben would be able to become self-employed. In fact, we understood that Ben took over Mr Baldwin’s garage when Mr Baldwin ceased trading.19. The garage was a small unit with limited parking space. It seemed to us from the evidence and from the photographs that it could handle little more than one car at a time. The garage opening hours were 8 a.m. to 5 p.m. Monday-Friday. There was some debate as to the opening hours on Saturday, but it seemed to us more likely than not that the garage was open from 8 a.m. to 1 p.m.20. As regards the handling of cash received from the business, Mr Baldwin kept the cash under an iPad at office in the garage. He mentioned that he usually kept £3000-4000 of cash at his home. Mr Baldwin made frequent deposits of cash at his bank.21. In April 2013 Mr Baldwin installed a credit card machine which he told customers was his preferred method of payment.22. Mr Baldwin furnished HMRC with sales and purchase invoices and with bank statements and paying in books. HMRC scheduled the invoices and bank statements into spreadsheets split by tax years.23. Examining Mr Baldwin’s self-assessment tax returns, HMRC concluded that Mr Baldwin had exceeded the VAT registration threshold for tax years 2014/15 at £84,296 and 2016/17 at £83,398.24. Moreover, HMRC considered that there were discrepancies in the documentation provided by Mr Baldwin, particularly as regards his invoices. In short, HMRC considered that there were a number of “missing” invoices because Mr Baldwin’s bank statements disclosed credits which were not supported by sales invoices. In addition, there were, in HMRC’s view, a number of duplicate invoice numbers on the sales invoices provided by Mr Baldwin. For example, on 30 October 2014 invoice number 2887 was duplicated and on 4 November 2014, invoice number 2893 was also duplicated. Moreover, some invoice numbers were clearly out of sequence. For example, on 6 May 2015, invoice number 3070 was followed by invoice number 3171. Similarly, on 23 May 2016 invoice number 2528 was followed by invoice number 3539.25. Mr Bramley submitted that these were simply examples of Mr Baldwin’s “numerical incompetence” rather than representing any attempt to falsify his records and we accept that submission. It seemed to us that Mr Baldwin’s record-keeping as regards invoices was disorganised and somewhat chaotic and we had some doubts as to whether many of the so-called “missing” invoices ever existed at all. It appears, however, that HMRC took little or no account of the duplication or the obvious errors in sequencing in compiling their invoice schedules.26. HMRC’s initial approach was to total the invoices and then apply and uplift of 30% to that total to take account of what they described as “missing” invoices.27. HMRC claimed that in 2014/15 there were 94 missing invoices, 89 in 2015/16 and 701 from 2016 to 2018. On the other hand, Mr Bramley, appearing for Mr Baldwin, argued that the corresponding correct number of missing invoices for those years were, respectively, 75, 136 and 189.28. We were not provided with the underlying invoices. However, we have carefully reviewed the schedules of invoices produced by both parties and consider Mr Bramley’s schedules to be more accurate.29. For example, in 2013/2014 Ms Verhoeven claimed that Mr Baldwin had not banked cash received from cash sales invoices amounting to £20,303. However, Mr Bramley’s analysis, which included the reconciliation of a number of invoices omitted by Ms Verhoeven and identified a number of other errors in her invoice listing, satisfied us that Ms Verhoeven’s claim that £20,303 of cash invoices were not banked was incorrect. Instead, reconciled bankings totalled £15,439 and the invoices not reconciled (amounting to £4,719) were accounted for by unidentified lump-sum bankings totalling £5,208 and unreconciled credit card sales. We shall return to bankings in 2013/2014 below.30. On 29 January 2019, HMRC issued a revised decision assessing Mr Baldwin to tax in the sum of £85,739.47. This assessment was based on the premise that Mr Baldwin was liable to be registered for VAT between 1 December 2012 and 28 February 2018. The assessment was calculated on the basis of Mr Baldwin’s invoices with a 30% uplift to represent missing invoices.31. Subsequently, in August 2019, HMRC changed tack. On 8 August 2019, after a review, HMRC revised its decision and concluded that the period of liability to be registered for VAT was from 1 September 2013 to 1 February 2018. This resulted in a revised VAT assessment in a reduced amount of £60,813.83. The reduced assessment of 8 August 2019 was calculated on Mr Baldwin’s bankings (reflecting cheque and card payments) with a 30% uplift applied to cash bankings. This was different from the earlier assessment which was based on Mr Baldwin’s invoices.32. More importantly, in the documents produced for the second hearing on 22 November 2020, Mr Bramley produced an analysis for each relevant year, pointing out errors in Ms Verhoeven’s own analysis of Mr Baldwin’s banking figures. Mr Bramley cross-examined Ms Verhoeven on these figures. We have carefully reviewed Mr Bramley’s analysis for each year and we have concluded that his calculations are correct. In short, Mr Bramley’s analysis showed that Mr Baldwin’s bankings for each year (2013/14 to 2017/18) reconciled exactly or almost exactly (any differences being de minimis ) to the amounts declared on Mr Baldwin’s self-assessment tax returns for those periods. Mr Bramley’s schedules revealed a number of invoices that had been missed by Ms Verhoeven, some allocated to the wrong years, some recorded in the wrong amounts, some recorded as debits rather than credits and some banking credits which were, in fact, non-VATable payments. Furthermore, a number of invoices, which HMRC claimed were paid in cash, turned out to have been paid by credit card. Taking each year in turn, the position was as follows:2013/14

£

76,054.64 - HMRC’s figures for total bankings75,813.09 - Appellant’s figures for total bankings75,813 - Amount of bankings declared on self-assessment return2014/15

£

84,814.62 - HMRC’s figures for total bankings84,295.92 - Appellant’s figures for total bankings84,296 - Amount of bankings declared on self-assessment return2015/16

£

74,870.70 - HMRC’s figures for total bankings76,489.60 - Appellant’s declared figures for total bankings76,489 - Amount of bankings declared on self-assessment return2016/17

£

79,917.44 - HMRC’s figures for total bankings83,397.99 [2] - Appellant’s declared figures for total bankings83,398 - Amount of bankings declared on self-assessment return2017/18

£

67,804.44– HMRC’s figures for total bankings71,006.28 [3] – Appellant’s declared figures for total bankings74,860.28 [4] – Amount of bankings declared on self-assessment return33. The result of studying Mr Bramley’s analysis of Mr Baldwin’s bankings and the work that Mr Bramley undertook in matching invoices to bankings suggested to us that there was a much greater evidential link between Mr Baldwin’s bank statements and his invoices than HMRC recognised and that Mr Baldwin’s bankings related to numerous invoices which HMRC claimed had not been banked. We concluded that it was not safe to rely on HMRC’s calculations.34. We also accept Mr Bramley’s submission that, in any event, HMRC’s calculation of a 30% uplift on cash payments was flawed. The 30% uplift was based using a percentage of cash banked in the year 2012/13 (cash representing 48% of Mr Baldwin’s total bankings in that year). However, as we have already noted, in April 2013 Mr Baldwin installed a credit card machine which he told customers was his preferred method of payment. Unsurprisingly, the amount of cash received in 2013/14 fell when compared with 2012/13. HMRC did not appear to take this change of circumstances into account when calculating the average cash uplift.35. Moreover, we accept Mr Bramley’s argument that HMRC’s figures included an element of duplication. For example, as regards the year 2014/15 HMRC claimed that £84,702.20 had been banked by Mr Baldwin representing payments by cheque and by card (70%). HMRC, applying a 30% cash uplift, claimed that the cash received by Mr Baldwin was, therefore, £36,300.94, giving Mr Baldwin a total turnover of £121,003.14. But as Mr Bramley pointed out, one of the results of the analysis of bankings, referred to above, was that HMRC’s cheque and card figures already included a certain amount of cash.36. We have already mentioned HMRC’s estimate of Mr Baldwin’s taxable turnover of £121,003.14 for the year 2014/15. HMRC’s calculation of Mr Baldwin’s taxable turnover for all relevant years was as follows:

Tax Years

Total

2013/14

£93,594.66

2014/15

£121,003.14

2015/16

£106,388.14

2016/17

£110,837.77

2017/18

£80,407.26

37. In the course of the enquiry, HMRC were provided with Mr Baldwin’s business records (invoices, bank statements etc.). HMRC retained those records for a lengthy period of time, making it difficult for Mr Bramley (in the absence of those records) to assess HMRC’s calculations and schedules. The intervention of Ms Verhoeven’s manager resulted in the return (albeit, even then, with some delay) of those records. In response to Ms Verhoeven’s claims and the non-return of Mr Baldwin’s records, Mr Bramley decided, in January 2019, to produce a business model using information from Mr Baldwin’s self-assessment returns. At the hearing, Mr Bramley described this as a “sanity check”.38. Mr Bramley assumed that the garage could only work on one car at a time, which did not seem to us to be disputed. Mr Baldwin’s income was generated from charging an hourly rate to his customers for his labour and by adding a small mark-up (10%) to parts used in servicing etc. taking the opening hours of the garage and assuming a three-week holiday. Mr Baldwin’s labour rate was £30 per hour (figure which had remained constant since 2012). [5] Mr Bramley also calculated the parts sold by Mr Baldwin, together with the 10% mark-up. The calculations were as follows:

Years

2013/142014/152015/162016/172017/18

Projected Parts Sales

£32,368

£38,706

£29,372

£31,112

£34,310

Total Sales Declared

£75,813

£84,296

£76,489

£83,398

£71,005

Labour Content

£43,445

£45,590

£47,117

£52,286

£36,695

As a Percentage of Expected Maximum Labour Charge

67%70%73%81%62%*

*Adjusted for 11 month period

39. Mr Bramley noted that these figures (i.e. the labour content) reflected the fact that Mr Baldwin suffered from ill-health and was not able to work at full capacity. His trainee, Ben, was not productive in the first few years but later proved to be more efficient as he became more experienced and in the later months of 2017 was able to contribute to Mr Baldwin’s business.40. In addition, in 2016/17 there were MoTs of £284 and an insurance refund of £282.06 (evidenced by a bank paying in slip). Both amounts were non-Vatable. Subtracting these figures from the Total Declared Sales for the year resulted in a total of £82,832 i.e. an amount just under the VAT registration threshold for the year (£83,000).41. These calculations and assumptions did not seem to us to be unrealistic, particularly taking account of the time Mr Baldwin would need to spend dealing with customers (both in person and on the telephone), ordering parts and supplies, attending to paperwork and banking cash and cheque proceeds. Admittedly, these estimates are rough and ready, but they at least indicated to us that HMRC’s figures for Mr Baldwin’s taxable turnover were too high.42. HMRC placed some reliance on the fact that, in their view, Mr Baldwin’s cash bankings in 2015/16 amounted to only £399 (an amount credited to Mr Baldwin’s business bank account on 25 July 2015). This, it was argued, indicated that Mr Baldwin had suppressed his cash takings. It seemed to us, however, that this point lost some of its force when it was considered that HMRC appeared to have overlooked a cash credit to Mr Baldwin’s business bank account on 8 January 2016 of £520. This brought Mr Baldwin’s cash takings, per his bank account, to £919 at least. This credit of £520 was wrongly attributed in HMRC’s banking schedules as a credit card payment. This did, once again, reduce our confidence in HMRC’s figures. It is true that Mr Baldwin’s cash takings in 2015/2016 were, apparently, lower than in other years but we did not consider that it fundamentally changed our view that Mr Bramley’s figures were closer to the truth than those of HMRC.43. We should also mention the voluntary disclosure of £3,854.00 in respect of 2017/18. In an email to Ms Verhoeven of 6 February 2019, Mr Bramley stated:
“Also our e-mail and letter to you of 24 January indicated that there may have been underdeclared sales of £3,854 … in that period and this amount was added to his previously declared turnover before submission of his S/A return.”
44. Mr Bramley explained that, in January 2019, because of the doubts that existed in the course of the enquiry due to HMRC’s claims and, in circumstances where HMRC refused to return Mr Baldwin’s books and records and to release details of their calculations, with the approaching self-assessment return deadline approaching, an additional £3,854 was added to Mr Baldwin’s turnover for the year 2017/80 in respect of potential additional sales. Mr Bramley argued that, against this background, his firm could not ethically submit Mr Baldwin’s self-assessment return without making this voluntary disclosure. Mr Bramley notified Ms Verhoeven of this £3,854 amount by email on 6 February 2019. This was taken from Mr Bramley’s business model calculations. This amount was added to Mr Baldwin’s turnover in Mr Bramley’s schedules. We accept Mr Bramley’s explanation.45. In addition to the VAT assessment, a penalty notice was issued under Schedule 41 to the Finance Act 2008 (“FA 2008”) for the non-deliberate failure to notify Mr Baldwin’s liability to be registered for VAT in the sum of £24,578.40.46. As we have mentioned, the penalty has remained as it was assessed on 29 January 2019 and HMRC have requested that this Tribunal should reduce the penalty to £17,331.94 to reflect the reduced VAT liability assessed in August 2019.

Discussion

47. In this appeal, the burden of proof lies on the taxpayer to prove, on the balance of probabilities, that his taxable turnover was below the VAT registration threshold in the periods in question. The burden of proof is on HMRC to show that the penalty was correctly assessed and notified to Mr Baldwin.48. In the course of a hearing lasting two full days (albeit somewhat extended by some interruptions), we were presented with many schedules of figures, in a calculations bundle of of 280 pages, many of which contradicted the other party’s schedules of figures, and in circumstances where in a number of cases (particularly as regards the invoices) the underlying documents were not made available. We have, therefore, sought to analyse the competing figures put forward by HMRC and by Mr Bramley. As we have already indicated, we consider that the calculations made by Mr Bramley both as regards invoices and bankings to be more reliable than the figures put forward by HMRC. We considered that HMRC’s 30% cash uplift was excessive, for the reasons we have given, and we considered that many of their schedules and calculations were inaccurate.49. That said, even on Mr Bramley’s figures, in 2014/15 Mr Baldwin exceeded the VAT registration threshold. We therefore consider that in that period Mr Baldwin was liable, but failed, to register for VAT and that Mr Baldwin was liable to a penalty in relation to that period, to be assessed on the total sales declared (as set out in paragraph 38 above), subject to any application of paragraph 1(3) Schedule 1 VATA. Thus, to the extent that Mr Baldwin can satisfy HMRC that his turnover in the following 12 months would have fallen below the deregistration threshold, the penalty can be avoided. The extent that the penalty relates to other periods, it is discharged.50. HMRC submitted that a valid decision was notified to Mr Baldwin that he was liable to be registered for VAT. Although on 8 January 2019, Mr Baldwin had been made aware of HMRC’s decision to treat him as liable to be registered for VAT for the correct period, a subsequent letter of 29 January 2019 contained an incorrect period. In any event, the correct period was notified to Mr Baldwin in a further letter issued on 29 January 2019. Moreover, on 8 August 2019, HMRC revised its decision which was applicable to a new period (1 September 2013 to 1 February 2018). In our view, Mr Baldwin was validly notified of his liability to be registered for VAT. In any event, Mr Bramley did not seek to dispute this point at the hearing or in his written submissions.51. We have also considered whether, under paragraph 20(1) of Schedule 41 FA 2008, Mr Baldwin has established a reasonable excuse for his failure to register for VAT. As already noted, we are aware of Mr Baldwin’s periods of ill-health, but there was nothing specifically drawn to our attention which would prevent Mr Baldwin from duly complying with his tax obligations. No medical evidence was put forward by Mr Bramley. Again, Mr Bramley did not seek to excuse the penalties levied on Mr Baldwin on the grounds of “reasonable excuse”.52. Accordingly, subject to any application of paragraph 1(3) Schedule 1 VATA, we uphold the imposition of a penalty (to be assessed as indicated above) in respect of 2014/15, but we discharge the penalties in respect of other periods. This appeal is, therefore, allowed in part.

Right to apply for permission to appeal

53. 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.

GUY BRANNAN

TRIBUNAL JUDGE

RELEASE DATE: 22 JANUARY 2021

[1] It is not clear whether Mr Baldwin received similar payments in other years.[2] After deducting an amount of £390 a non-VATable refund in relation to a key fob[3] After deducting £1543.92 in respect of non-VATable sales (college grant and insurance refund)[4] After adding £3854.00 in respect of a voluntary disclosure of potential underdeclared sales - Mr Bramley's letter dated 6 February 2019 - see paragraphs 43-44 below.[5] Mr Bramley noted that Mr Baldwin would, but only rarely, charge £35 per hour when he worked on heavy commercial vehicles.