Neil Warren wonders how HMRC did not spot that a company which was trading ten times over the VAT registration threshold was not registered for VAT.
A technique used by HMRC in recent years is to review annual corporation tax (CT600) returns and self-assessment returns for self-employed businesses, to identify those businesses that have exceeded the VAT registration threshold but which are not actually registered. HMRC then raise a query with the taxpayer.
I am sure this process is carried out by a computer rather than as a manual exercise. However, it did not work in the case of Dance with Mr D Ltd (TC 05839), a theatrical production company, which should have registered for VAT in January 2012 but did not notify its liability until May 2014. Importantly in this case, the taxpayer notified his liability to register for VAT rather than HMRC identifying that the company had made annual taxable sales of £960,000 on average, during the late period.
Late registration penalty
The company incurred a late registration penalty of £41,666 (the net tax liability for the late period was £347,222). This is a 12% penalty; the minimum penalty for being more than 12 months late in registering is 10% of the net tax liability. The issue in dispute was the level of the penalty and whether the “special circumstances” claimed by the taxpayer meant the penalty should be reduced to nil.
What are special circumstances?
The taxpayer claimed that it was only when he changed accountants that the liability to register for VAT was advised to him. He notified his liability as soon as this advice was given and his lateness was not deliberate. He cited a previous FTT case James Hillis (TC02611), which concerned a solicitor who was late registering because he was so busy and escaped a penalty. The director of Dance with Mr D was also very busy with extensive overseas travel connected with his theatre shows.
The tribunal concluded that overseas travelling did not constitute either an “exceptional or uncommon” situation and dismissed the appeal on this issue. The FTT also concluded that reliance on a third party was not a reasonable excuse in this situation.
However, the judge thought that 30% discount on the penalty should be given for the taxpayer “telling” HMRC about the late registration, rather than the 25% discount allowed by HMRC. So the 12% penalty was reduced to 11%. The final penalty amount of £38,194 gave the taxpayer a discount of nearly £3,500, and therefore partly justified his decision to make an appeal.
What went wrong?
The question must be asked: How did the company’s previous accountants miss the fact that the company should have been VAT registered in January 2012? After all, it is not as if the sales figure crept over the threshold figure by a few thousand pounds, like a builder suddenly having a big job.
Some supplies linked to theatrical productions are exempt from VAT. Did the company’s previous accountant wrongly assume that Dance with Mr D’s sales were exempt? However, these exempt supplies are restricted to admission fees for theatrical events organised by either public or eligible bodies, i.e. local authorities or non-profit making entities (VATA 1994, Sch 9, Group 13, Items 1 and 2). There is no exemption for a profit making business run on a commercial basis.
Another idea is that the company accounts may have been produced by a junior member of staff who completely forgot about the VAT registration threshold. Or was the reality that the accountants alerted the director to the VAT problem, who did not act upon the advice? I have no idea what was the root cause of the late registration in this case.
Overall, it is worthwhile for advisers to stand back and ask the question: Do we have any Dance with Mr D clients in our practice? These are businesses where VAT seems to have been completely overlooked and the business is trading well over the threshold.
Don’t forget that a late registration can be corrected by HMRC going back 20 years, so it is not a problem that will quickly disappear with the passage of time.
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.