Neil Warren considers the case of Salman Ali Chaudry (TC07050), who told HMRC that he was an employee of two off-licence stores in Glasgow and did not own them.
In all my years of reading VAT cases, I can’t recall reading one where the supposed business owner denied that he owned the business subject to an HMRC enquiry.
Chaudry claimed he was not a sole trader running two off-licence stores in Glasgow but worked as an employee of a separate company, Urban Off Sales Ltd. There were no PAYE records for this company and the details held at Companies House were sparse. Even when the taxpayer admitted under caution that he did own the businesses, he subsequently claimed again that he was an employee.
Assessment and penalty
HMRC raised a VAT assessment against Chaudry for £113,432 covering the period from 1 May 2012 to 30 June 2014, when he should have been VAT registered. HMRC also charged a penalty of £45,443 for failing to register on time, which was based on the period between 1 May 2012 and 2 September 2013 (the date when the problem was identified), representing 63% of the tax owed during this period ie £72,133.
There are times when HMRC officers are criticised for assessing an amount of VAT that is far too high, but the officer in this case seemed to bend over backwards to ensure that the assessment raised using his ‘best judgment’ (in the absence of a VAT return being submitted for the late period) was not overstated. He made the following adjustments:
- The original registration date of 1 August 2011 was moved forward to 1 May 2012 on the basis that HMRC could not prove the taxpayer owned one of the shops for a period of time, even though there was no evidence of any alternative owner.
- Daily gross takings figures for a 12-month period were analysed in detail to establish an average takings figure for each day of the week, ie to reflect that some days were busier than others.
- Purchase invoices were examined in detail for July 2013 to ensure a fair input tax allowance was made for all months during the late period.
- The officer accepted the taxpayer’s verbal answer that he ceased to trade on 30 June 2014 and this became the date of deregistration.
Late registration penalty
HMRC treated the taxpayer’s late registration as a ‘deliberate’ mistake because he had been VAT registered in the past when he ran an off-licence in London, so he should have known about the relevant thresholds.
The VAT registration was ‘prompted’ action because it resulted from an HMRC visit to the Glasgow premises. This meant the penalty had to be imposed in range of 35% to 70% of the tax outstanding, from the period when he should have registered up to the point when HMRC discovered a problem. HMRC gave a 10% penalty reduction for some co-operation being given by the taxpayer ie a 63% penalty was applied.
The taxpayer did not have professional help but an adviser would almost certainly have given two pieces of crucial advice to limit the damage:
- Hold up your hands and co-operate with HMRC with the aim of bringing the behavioural penalty as close to the 35% minimum as possible.
- Complete your own VAT return for the late period, based on the records you have available, rather than give HMRC free rein to make its own calculations. When HMRC raises an assessment to estimate the tax due in the absence of a return (s 73(1) VATA1994), a taxpayer has no right of appeal against the officer’s estimated figures for either output tax or input tax.
The taxpayer’s appeal was dismissed on all counts, as the tribunal was satisfied that he owned the two off-licence stores and should have been VAT registered from 1 May 2012 to 30 June 3014.
I say well done to HMRC on this case. The officer’s fairness and patience deserves 10 out of 10!
About Neil Warren
Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.