Seller of fake car parts driven into HMRC’s arms

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Neil Warren examines how and why HMRC arrived at the estimated date of VAT registration for a business that sold counterfeit car accessories.

HMRC was not the fastest off the grid when tracking the trading arrangements of Neil Edgell (TC06853). Local Trading Standards officers had already prosecuted Edgell in February 2014, when he pleaded guilty to 27 charges under the Trade Marks Act of selling £427,422 worth of counterfeit car parts between January 2008 and February 2012.  

HMRC’s compliance team became aware of this prosecution in 2014 and were happy to use the figures of total turnover calculated by Trading Standards.  

Backdated registration

HMRC’s main interest was the fact that Edgell had never registered his business for VAT. The compliance team did a simple calculation based on 49 months of trading and £427,000 of total sales – ie his average monthly sales were £8,714.

The VAT registration threshold from April 2008 was £64,000. Assuming Edgell started trading in January 2008, he would have exceeded the VAT registration threshold in August 2008, producing a required date of registration of 1 October 2008.

HMRC calculated that his VAT liability for the period October 2008 to February 2012 was £45,287, after allowing 15% of his total output tax figure to be claimed as input tax. HMRC also issued a late registration penalty for £6,793 (15% of the tax due).

Taxpayer argument

The taxpayer claimed that the turnover figure of £427,000 calculated by Trading Standards was wrong, as it included sales of personal items such as sofas, CD/DVDs and five cars.

The tribunal recognised there were some personal sales, and allowed a total of £10,000 for those items. Edgell claimed that the figure for personal items was much larger than this amount.

Best judgment

The tribunal was satisfied that the turnover calculation based on a straight monthly sales split of £8,714 met the conditions of ‘best judgment’ for assessment purposes (s73(1), VATA1994).

The court was also satisfied that although the HMRC interest started in 2014, and the final assessment was not raised until 25 January 2017, this had not violated the requirement to raise an assessment within 12 months of having the full facts available. This was because HMRC had tried to work with the taxpayer throughout 2015 and 2016 to establish an accurate sales figure using PayPal information.

It was only when these efforts were exhausted that HMRC raised the assessment based on the ‘best judgment’ calculation.

Decision

The appeal was partly allowed to the extent that the gross taxable sales were reduced by £10,000 for the sale of personal items (non-business). HMRC was instructed to revise its calculations for both the date of registration and tax arrears and to amend the penalty based on £417,000 of gross sales.

Learning points

This case shows how little work HMRC needs to do in some situations in order to raise a ‘best judgment’ assessment that gets the backing of the courts. The calculations would have only taken about five minutes to do. It also shows how HMRC often uses information obtained from other sources to identify and collect tax arrears.

The calculations were accepted by the tribunal as a “reasonable conclusion” and “an honest attempt to make a reasonable assessment of the VAT payable”.

It is the responsibility of the taxpayer to show why HMRC’s calculations could be wrong, and substitute alternative figures in their place. Edgell did not do this, so was always likely to fail in his appeal. 

About Neil Warren

Neil Warren

Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.

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14th Jan 2019 17:53

Hang on!

Years back when I was studying VAT regulations in depth, Illegal Items were "Outside the Scope" for VAT.

Since the supplied parts were illegal, then logic dictates such were Outside the Scope for VAT charging purposes.

Case Law:

"The unlawful supply of narcotic drugs on the domestic market of a Member State, which, like the unlawful importation of such drugs into the Community, can give rise only to penalties under the criminal law, is alien to the provisions of the Sixth Directive on the harmonization of the laws of the Member States relating to turnover taxes . Consequently, Article 2 of the Sixth Directive must be interpreted as meaning that no liability to turnover tax arises upon the unlawful supply of narcotic drugs effected for consideration within the territory of a Member State in so far as the products in question are not confined within economic channels strictly controlled by the competent authorities for use for medical and scientific purposes .

That finding is without prejudice to the powers of Member States to impose appropriate penalties in respect of contraventions of their drugs laws, with all the attendant consequences, in particular of a pecuniary nature .

The unlawful supply of hemp-based drugs is also not liable to value-added tax even where, pursuant to a selective prosecution policy, the authorities of a Member State do not systematically bring criminal proceedings against small-scale retail dealing in such drugs ."

Source: https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX%3A61986CJ0289

(N.B. There are a number of citations.)

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14th Jan 2019 18:10

Interestingly, another case is perhaps more apposite: since it involved counterfeit Perfumes.

https://library.croneri.co.uk/cch_uk/bvc/1997-bvc-307

The conclusion seems to be, don't become involved in fake goods.

Import fake money!

Since counterfeit currency is exempt as it is "Outside the scope".

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