Liable Not Liable: The concession not mentioned in HMRC’s registration manualby
Neil Warren considers the case of Tim Hughes who registered for VAT late, but benefited from an undocumented VAT concession which reduced his penalty.
At first sight, the tribunal case of Tim Hughes (TC06609) didn’t look very exciting, even for VAT enthusiasts. It was a routine victory for HMRC over a late registration penalty.
The taxpayer’s guest house business should have registered for VAT on 1 July 2011 because he exceeded the threshold on 31 May 2011. As this error was not picked up until HMRC’s hidden economy team came knocking in 2015, Hughes could not argue against the penalty.
However, there are two important issues that can be drawn from this case.
Liable not liable concession
Hughes felt he had been given a bad deal by HMRC; an assessment for £9,685 and a late registration penalty of £1,937 (20% of the tax due), but, it could have been a lot worse.
HMRC had generously applied the “liable not liable concession” (sometimes referred to as “liable no longer liable”), so that his actual period of VAT registration was only between July 2011 and November 2012.
The liable not liable concession is relevant when a business has failed to register on time, but HMRC recognise the business has fluctuating turnover, such that the total taxable sales fall below the threshold on a future date. This happened at the end of November 2012 in the case of Hughes, so his period of registration was cut short to end on this date rather than continued through until 2015.
The liable not liable concession is set out in HMRC’s Registration manual between VATREG28050 and VATREG28550, but the text on all of those pages has been withheld from public view and replaced with : “This content has been withheld because of exemption in the Freedom of Information Act 2000”. HMRC officers will be able to read the detail of the concession on their version of the VAT registration manual.
It is important for tax advisers to be aware of this concession if clients have a late registration problem. Where this applies to your client, to ask HMRC to operate the concession (if appropriate), in cases where it isn’t offered.
Executing a plan
There is an old saying that if you fail to plan, you plan to fail. This statement is not relevant to Hughes, who had a clear plan in place to keep his business below the VAT threshold. The problem was that he did not execute his plan.
His business comprised a pub, restaurant and accommodation, which started trading in April 2010. His original intention was to create two separate legal entities, the pub and restaurant trading as one entity, and the accommodation as another, so that each entity could comfortably trade below the VAT registration threshold. However, this business split never materialised.
He claimed that he only intended to trade between April and November each year but a shortage of cash meant the business traded in the first calendar quarter of 2012. This first quarter trading was not repeated in 2013 and future years. Hence HMRC was able to apply the liable no longer liable principle and let him escape the VAT net in November 2012. A trading period of eight months each year kept him below the VAT threshold.
It is essential that an unregistered business carefully records its rolling 12-month turnover and avoids the mistakes made by Hughes. This is even more important now for three reasons:
The VAT registration threshold will be frozen at £85,000 until April 2020 at the earliest, so future price increases and extended trading hours need to be fully considered. Hughes might have to reduce his working months to seven next year to avoid a VAT problem if he puts up his rates!
The potential monetary advantage of the flat rate scheme was eroded for many businesses by the new ‘limited cost trader’ category introduced from 1 April 2017 with its draconian rate of 16.5%.
If a business is VAT registered and trading over the threshold, then you know what will be waiting at the door from April next year – MTD, of course!