VAT: Two wrongs don’t make a right

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Neil Warren reviews a case where HMRC and the taxpayer both made mistakes, but the outstanding VAT still had to be paid, with penalties for late registration.  


The case of Ahmed Rasouli (t/a Euro Foods) v HMRC (TC05910) was ostensibly about whether the taxpayer registered for VAT on the correct date. The starting point of any VAT registration challenge is to determine the date when a business is obliged to register, i.e. when the compulsory registration threshold has been exceeded.


Euro Foods traded as a convenience store selling food, household products, alcohol and tobacco. Rasouli took over the business of Euro Foods on 1 April 2012, according to HMRC.

As he took over the business as a going concern (although this was disputed by Rasouli), he was obliged to register from his first day of trading, because the previous owner of the business was trading above the VAT threshold. This is a key factor in the transfer of a going concern rules; the buyer must treat the seller’s taxable sales as part of his own turnover (VAT Notice 700/1, para 3.8).

Disputed dates

The first dispute was whether Rasouli actually took over the business on 1 April 2012. The tribunal disagreed with HMRC’s conclusion and decided that 12 October 2012 was the relevant date because this was when the lease of the shop and flat was transferred to Rasouli from the previous owner.

It was also established that the seller had accounted for output tax on VAT returns until at least 31 August 2012, so 1 April 2012 could not have been the relevant registration date for Rasouli.

Late registration penalty

The taxpayer had been advised by his accountant in 2012 that he should have registered for VAT, but he ignored this advice. This led HMRC to believe the taxpayer knew what he was doing when he missed the VAT registration date, so they treated the late registration as a “deliberate error not concealed”, and issued a penalty for £4,989.

This is a key feature of a late VAT registration: the level of penalty is determined by the behaviour of the taxpayer that caused the late registration, which is categorised into:

  • non-deliberate (0-30%)
  • deliberate (20-70%)
  • deliberate and concealed (30-100%)

This percentage is multiplied by the tax unpaid for the late period (the potential lost revenue: PLN) to establish the penalty – see leaflet CC/FS 11.

To make it worse for Rasouli, the VAT registration was “prompted” by HMRC visiting the taxpayer. The penalty for a prompted disclosure of a deliberate error is 35% to 70%. Where the taxpayer comes forward and registers for VAT of his own accord the penalty would be 20% to 70%.

Best judgment

Another point of disagreement was whether the HMRC officer had used his “best judgment” in establishing the tax arrears of £7,805 for the late period between 2012 and 2014, and whether the penalty of £4,989 was also fair. The HMRC officer had given a 50% discount for the penalty to reflect the help given by the taxpayer.

All the parties agreed that 31 July 2014 was the correct deregistration date because this was when Rasouli sold the business to a third party, Mr Ahmed. The tribunal supported HMRC’s tax and penalty calculations in principle, with the only adjustment being to reduce the start of the late period from 1 April 2012 to 12 October 2012, which had the effect of reducing both the tax and penalty payable by Rasouli.

Learning points

This case illustrates how HMRC can make flawed decisions when there are a lot of confusing issues happening at the same time. But the taxpayer was also guilty of ignoring his accountant’s advice to register and hoping a potential VAT problem would never come to light.

It is important clients are aware that late VAT registrations can be corrected by HMRC going back 20 years - a power they will be prepared to use if appropriate!

About Neil Warren

Neil Warren

Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.


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