In December 2013, we completed our clients 2012/2013 tax return and discovered that his turnover was unusually high. This was because of a large one-off contract undertaken in October 2012 for £50,000. Before this, our client's average turnover was approximately £3,000 per month. Unfortunately, this large contract meant that our client's turnover exceeded the VAT threshold. Shortly after, our client ceased trading on 15th January 2013.
We decided to apply for VAT exception, due to the unusual circumstances leading to the threshold being breached. We know that this should have been done at the time, but we were unaware of the situation until completing our client's tax return over a year later. Our client was naïve and didn't realise a sudden increase in turnover could cause any problems. HMRC decided to refuse our application and said that our client is liable for the VAT that should be have been charged in the period 01 December 2012 to 15 January 2013.
We asked for an independent review and after a few weeks, they decided to uphold HMRC's decision. Surprise surprise. But the detailed decision provided by the reviewer isn't satisfactory. His letter stated that the decision must be made as if it was applied for at the time of reaching the threshold, meaning only information up to that date could be considered. This was taken from his letter;
"When considering exception requests, the Commissioners must take into account facts that would have been available at the time the threshold was breached and cannot consider information that became available later or with the benefit of hindsight. Although retrospective requests for exception can be considered, in order to comply with the legislation, the Commissioners must come to the decision that they believe would have been made at that time. The VAT threshold was exceeded at the end of October 2012."
With this in mind, we do not agree with his decision. When reading the following paragraph from his letter, it seems like he based his decision on the turnover after the event, as it was higher than expected. But according to the above, this information cannot be used as it wouldn't have existed at the time the application should have been made. This is part of his conclusion.
"In this case the turnover was historically below the VAT registration threshold prior to October 2012 but the future indications were that, although a contract of the size of the October 2012 contract was not to be expected, there would be a larger volume of work than previously - see, for example the turnover figures for November 2012 to January 2013 inclusive."
Are we right in disagreeing with his decision as he has used future information to make it? We have two options; accept the decision or appeal to a tribunal.
Here are his approximately turnover figures up to October 2012, as this is what the decision should have been based on.
May 2011 - £1100
June 2011 - £400
July 2011 - £800
August 2011 - Nil
September 2011 - £750
October 2011 - £7850
November 2011 - £2800
December 2011 - £1200
January 2012 - £1800
February 2012 - £4700
March 2012 - £2500
April 2012 - £5000
May 2012 - Nil
June 2012 - £250
July 2012 - £4850
August 2012 - £2350
September 2012 - £1250
October 2012 - £51100 (Includes one-off contract of approximately £50,000, most of which was for materials)
Based on the above, do you feel that VAT exception should have been granted?
Replies (5)
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has he actually gone over the limit
how was the final amount billed and whattime scale was involved and is there nay chance that he can rebill the 51,500 and reclaim old inputtax suffered
What have HMRC done about the limited company?
Did the Ltd gain exception or is that still registered for VAT?
I'm assuming the Ltd is registered here, because if the sole prop was liable to be registered then the transfer to a ltd company would render the ltd liable to be registered from the outset as well, so how has this been treated?
Or have HMRC not noticed the limited because they've got the information that the 'client ceased trading on 15th January 2013'. In which case your client has a further mess of trouble stored up for later.
I'd agree prima facia that it's hard to see a rationale for £3k to £5k turnover per month being above the registration threshold. Do they have concerns that since the client had the capacity and ability to enter into a £50k one off contract, trebling his turnover in one year, that it's likely he would continue to attract such one 0ff contracts at regular intervals.
As an academic exercise how right were HMRC, what has the turnover of the limited company been?