VAT: Artists muddle zero and exempt for overseas sales
A partnership of two artists was partly successful in its appeal against a late registration penalty, although the partners had misunderstood HMRC’s advice about exempt sales.
I remember a phone call with an accountant about 15 years ago, who made a comment that builder services on new houses were exempt from VAT.
“You mean zero-rated,” I corrected.
“Same difference,” he replied, “no VAT is charged on his work.”
The confusion between zero-rated and exempt supplies has always caused massive VAT problems for small businesses, which was clearly highlighted in the case of the husband and wife partnership: Alan and Carolynda MacDonald (TC07390).
The MacDonalds are successful artists who sell their works all over the world. They had been advised by their accountant that they only needed to calculate the sales in the UK and the EU for VAT registration purposes.
The partnership was late registering for VAT in 2011 because the partners thought that exports of goods to countries outside of the EU were exempt from VAT, ie excluded from the registration tests. This is not the case: exports of goods outside of the EU are zero-rated and must be included in the tests for registration.
Exemption from registration
With MacDonald already confused about the meaning of the word ‘exempt’, the story took a further twist when HMRC considered if the partnership could avoid registering for VAT by being granted an “exemption”.
“Exempt” and “exemption” are similar words but with a totally different meaning! HMRC checked to see if the zero-rated exports were such a high proportion of total sales that the partnership would be in a repayment VAT position if it was registered, ie the business could qualify for a registration exemption (VAT Notice 700/1, para 3.11).
After a lengthy exchange of correspondence, it was decided that exemption was not appropriate.
Facts and figures
To illustrate the confusion, there was a fantastic sentence in a letter sent by HMRC to the taxpayers’ accountant in 2015:
“We have not granted them exemption from registration, but we have not registered them for VAT.”
There was a justified reference in the tribunal report to “conflicting advice” from HMRC. But the end result was that the business should have registered from 1 April 2011 to 31 December 2011, and again from 1 April 2012 to 30 November 2012. VAT owed was £5,573, with late registration penalties of £958 for 2011 and £267 for 2012 charged.
The basis of the appeal was that the taxpayers’ confusion between zero-rated and exempt sales was a reasonable excuse for not registering on time and the penalties should be reversed. The court reviewed the penalties on the following basis:
“To be a reasonable excuse, the excuse must not only be genuine but also objectively reasonable when the circumstances and attributes of the actual taxpayer are taken into account.”
In other words, MacDonald as an artist might not be expected to understand the difference between zero-rated and exempt sales but another business owner would be expected to have total clarity of thinking – for example, an accountant.
The court reversed the first penalty of £957 but upheld the 2012 penalty because the partnership changed its accountant in 2010 to “someone more professional” and therefore an awareness of the VAT issues should have been clearer.
HMRC public notice
Does HMRC’s guidance give clear advice about the VAT treatment of exports for registration purposes? VAT Notice 700/1, para 2.4 explains about zero-rated sales, including exports of goods.
It is reasonably clear but I would have liked to see an extra sentence: “All zero-rated supplies are included in your total sales figure when checking if you have exceeded the registration threshold.”
The partnership was first liable to register for VAT on 1 April 2011 but HMRC recognised that there were subsequent periods when turnover fell below the threshold again. Using the LNL concession HMRC excluded these periods from the arrears calculations on the basis that the business could, in theory, have deregistered.
If you have clients with a late registration challenge, make sure that HMRC considers and adopts its LNL policy.