Neil Warren examines a late registration case where the tribunal accused an accountant of professional negligence.
In all of my years of reading VAT tribunal cases, I can’t recall seeing such criticism of an accountant by a judge as I read in Peter Hartigan T/A Striking Iron (TC07109).
Hartigan traded as a sole proprietor, mainly dealing with repairing and fitting gates and had used the accounting services of Alan Henderson since he began in self-employment in 2005-06.
The tribunal concluded that Hartigan had been “seriously let down” by Henderson, who had shown a form of “professional negligence” by not following up on his client’s VAT registration despite the fact that Hartigan’s SA returns showed income that breached the threshold for over two years.
However, the situation was not helped by a disappointing performance by HMRC. The officer couldn’t even work out £26,783 x 20% in relation to a late registration penalty, coming up with a figure of £5,525 rather than £5,356.60. The judge said that the officer’s evidence “could be clearer and more precise as to matter of fact.”
I sympathise with Hartigan: he employed an accountant to do his self assessment tax returns, which declared turnover exceeding the VAT threshold from 2012/13 onwards, but the VAT registration problem did not come to light until two HMRC officers visited his home in November 2015. A backdated VAT registration was made to 1 December 2012.
Hartigan claimed he had never been advised to register for VAT by his accountant, and he believed that the VAT only had to be taken into account when profit (not turnover) exceeded a certain threshold. He had never charged VAT on his sales. The tribunal concluded that Hartigan had been let down by Henderson, and had “chosen the wrong accountant”.
Flat rate scheme
The fun and games continued when the taxpayer was encouraged by Tom Murray, a new accountant he had engaged, to join the flat rate scheme with retrospective effect from December 2012, and apply a 9.5% rate to his gross income that was relevant to his business.
HMRC calculated that tax of £21,335 was due for the period from 1 December 2012 to 31 March 2015 and £9,150 for the year to 31 March 2016 and assessed these amounts.
Murray submitted a VAT return for the year ended 31 March 2016 only, showing VAT due of £5,449 rather than £9,150, which seemed to be based on non-FRS accounting.
The judge felt that the trading arrangements of the business meant that it would have paid up to 40% less tax by staying out of the FRS, so £21,335 was a very high VAT bill for the period to March 2015. But HMRC does not allow a retrospective FRS withdrawal just because more tax has been paid.
However, the judge encouraged HMRC to allow Hartigan to withdraw from the FRS back to 2012 in view of the exceptional circumstances, and recalculate his liability.
I recommend you read this case and consider the highly critical comments made by the judge about Alan Henderson, Hartigan’s first accountant. It is possible that Henderson was a very busy man and that Hartigan was a small client who fell under the radar. However, we need to ensure that our small clients are given the same level of service as our bigger clients.
Also, before we encourage a client to join the FRS, we should be very clear whether it will work against them in terms of paying more VAT. Be aware of the draconian 16.5% rate for a limited cost business that has been in place since 1 April 2017.
I felt genuine sympathy for Mr Hartigan. His main skill is the ability to repair gates rather than dealing with academic subjects such as tax.
Overall, it was all a bit of a fiasco. If Lord Sugar had been judging this case I think his final words for both the accountant and the HMRC officer would be: “you’re fired.”
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.