The taxpayer was defeated over a penalty due for late registration but was aided by the application of HMRC’s secret 'liable no longer liable' concession.
The FTT case of Stanley Chmiel (TC07112) was a routine win for HMRC. His company Kudos Building and Electrical Services Ltd was late registering for VAT, and HMRC assessed the company for belated tax of £12,143.
HMRC decided the late registration was due to “deliberate not concealed behaviour” so the officer also issued a 35% penalty. This penalty became the subject of a personal liability notice against the director (Chmiel) when the company failed to pay the tax or penalty. HMRC can do this in the case of deliberate behaviour, using powers given by para 1, Sch 41, FA 2008. Chmiel’s appeal against the penalty imposed on him personally, failed.
Late registration period
However, the most interesting issue about this case is the way that HMRC applied its ‘liable no longer liable’ policy in relation to the late registration period:
The company exceeded the compulsory VAT threshold on 31 January 2012, so was liable to be VAT registered from 1 March 2012. So far, so good.
The company’s rolling 12-month turnover thereafter continued to be above the deregistration threshold until the year ended 31 August 2013 (£79,000 at the time and turnover was £78,319). The VAT deregistration threshold is £2,000 less than the registration threshold.
The turnover then exceeded the deregistration threshold again for the final time in the year to 30 September 2013 (£80,289), but subsequently was below that threshold.
HMRC treated the late registration period as being from 1 March 2012 to 31 July 2013, even though the company continued to trade until March 2016.
Liable no longer liable
HMRC’s liable no longer liable policy recognises the situation of a business registering late for VAT, but its turnover was below the deregistration threshold for part of the late period.
In the worst-case scenario, Kudos Ltd could have been issued with a late period return from 1 March 2012 until 31 March 2016 when it ceased to trade. But this would have been harsh because if it had registered for VAT on time, it might have been able to subsequently deregister because of falling turnover. The liable no longer liable concession meant that the company’s belated registration period was treated as lasting for just 17 months until July 2013. This is a brilliant outcome compared to 49 months if the concession had not been applied.
When this issue comes up in my consultancy work, I always refer to it as the “MI5 branch” of VAT. The operation of HMRC’s liable no longer liable policy is top secret – we have to guess how it will be applied in practice.
If you don’t believe me, check out HMRC’s VAT registration manual at VATREG28000. There is a feast of topics listed on the contents page for the liable no longer liable concession, but click on any of the links, and the material has been withheld under exemptions in the Freedom of Information Act 2000. It is, to misquote the title of the 1981 James Bond film, For HMRC’s Eyes Only.
The interesting fact was how Kudos’ period of late registration was deemed to cease on 31 July 2013. I would have thought that because the annual sales figure to August 2013 was so close to the deregistration threshold, and then exceeding it again in September 2013, the deregistration date would be 30 September 2013 under the liable no longer liable concession. This was a two-month bonus for the taxpayer. The later periods were more clear cut, eg turnover in the 12-month period to 31 October 2013 was a much-reduced £55,041.
I am not sure how HMRC does the calculations. A contact in the “VAT secret service” told me that there is a spreadsheet template followed by HMRC officers, but don’t quote me on this.
If you deal with any late registration issues for clients, don’t forget to ask HMRC to apply the liable no longer liable policy if appropriate, just in case the officer is unaware of its existence.