Independent VAT Consultant
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Shellfish business lands VAT penalties

HMRC reeled in the penalties from a fisherman who understated sales on his tax return and misunderstood his VAT registration obligations. Neil Warren explains what went wrong.

17th Sep 2019
Independent VAT Consultant
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Bunch pile of fresh Razor clams and shells at fish market

Kenneth Seath (TC07321) traded in the fishing industry, diving for shellfish and receiving a share of the catch, but understated the turnover on his self assessment tax returns from 2008 to 2014.

HMRC issued tax assessments totalling £70,400 and also charged him penalties of £45,886. The penalties for the years 2008/09 onwards were based on the taxpayer’s deliberate rather than careless behaviour. However, there were some interesting VAT issues as well.

Sole trader registration

Seath was VAT registered as a sole trader between 4 December 2000 and 5 January 2012 because he owned a pub called the Struan Bar. However, he overlooked the fact that it is a person who is VAT registered and not a business. He thought he was only VAT registered because of the pub and therefore did not declare any sales or expenses on his fishing activity VAT returns.

His thinking was a complete red herring because all business activities of a legal entity should be declared. This was a definite own goal because his fish sales are zero-rated as food, but he could have claimed input tax on all the related costs. Needless to say, HMRC was more interested in the direct tax issues.

Five-day overlap?

Having deregistered from VAT on 5 January 2012, Seath then applied for a new VAT registration on 22 February 2012 as a sole trader for the fishing activity, asking for a registration date of 1 January 2012.

This situation confused me. It meant that for five days he would have two active VAT registration numbers for the same legal entity – this cannot happen.

However, the wording in the case report is that Seath “wished to be registered for VAT with effect from 1 January 2012”. I suspect that HMRC amended the date to 6 January 2012.

Review activities

Many clients have a range of business interests, some operated online such as renting out rooms through Airbnb in parallel to their main business.

For example, a client who is VAT registered as a sole trader car mechanic may have a sideline activity of buying and selling car parts on eBay. This would not be a problem if his car mechanic activity was carried out as a limited company, ie in a different legal entity to the secondary eBay activity. This would avoid a VAT registration problem, assuming the eBay sales did not exceed the £85,000 registration threshold.    

Musical note

I had a recent query from an accountant whose client is VAT registered as a computer consultant. However, the client also has additional income from singing and playing the piano at old people’s homes in return for a modest fee.

The client said that she should not pay VAT on her fees because she does not do it for the money, but for the fact that she likes to provide entertainment for elderly people and she hopes the experience might help her to get better gigs in the future. But is there a VAT issue because she is providing a service in return for payment?     

Six business tests

A good starting point is to review the six business tests established in the Lord Fisher case back in 1981 (STC238). This case considered whether income received from organised shooting parties on Lord Fisher’s estate (mainly from family and friends) represented a business. See HMRC’s VAT Business/Non-business Manual VBNB21000 and VBNB22000.

Although the Fisher case is nearly 40 years old, the tests have largely stood the test of time. I considered them for my singer and concluded that the philanthropic nature of her sessions, plus the low fees, kept the musical income out of the VAT net as a non-business activity.

The same reasoning is likely to apply for income tax, to treat the musical performances as a hobby rather than a taxable trade.

However, the singing computer consultant cannot take advantage of the trading and miscellaneous income allowance (TMIA), as she already has a significant self-employed trade subject to income tax. If her computer consultancy was conducted through a company and her singing as an individual, the TMIA would certainly apply to the musical income to exempt £1.000 a year from tax. 


Seath lost his appeal about the tax assessments and penalties but the case serves as a useful reminder that it is the legal entity that is VAT registered (or liable to be registered) and not a business.

Replies (2)

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By Justin Bryant
17th Sep 2019 13:13

So possibly a separate shell company could have helped here?

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By The Dullard
18th Sep 2019 13:35

Isn't the VAT point moot? Isn't a share fisherman regarded as an employee of the boat owner, except for income tax and national insurance, such that for VAT purposes his share fishing activity fails the test of being a business? I wouldn't agree that he is making a zero-rated supply of fish; the boat owner makes that supply, surely?

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