Judgment summary
This is an appeal under section 83(1)(a) of the Value Added Tax Act 1994 against HMRC's decision to register Shahid Hussain for VAT with effect from 1 October 2017 (6). HMRC had issued VAT assessments under section 73(1) VATA of £32,579 for the period 6 April 2013 to 31 August 2017, together with associated penalties of £22,805 (6).
HMRC accepted that if Mr Hussain succeeded in his appeal against VAT registration, the VAT and penalties would fall away (6). The Tribunal allowed the appeal, with the result that the VAT assessments and penalties fall away (5, 46).
Background
Mr Hussain ran a takeaway called "Your Spiced" at 110 High Street, Dumbarton (7). Both parties accepted that he owned and ran the takeaway as a sole trader until 31 January 2015 (29).
From 1 February 2015, the parties disagreed as to ownership. HMRC's position was that Mr Hussain continued to own and run the takeaway, with turnover of £382,032 over the relevant period, making him liable to VAT (7, 30). Mr Hussain's position was that the business was transferred to YSD Trading Limited, a company wholly owned by him, from 1 February 2015, and then to Muta Foods Limited (owned by a third party, Mr Uddin) from 31 March 2017, with Mr Hussain working as an employee throughout (9, 30).
HMRC carried out inspection visits on 19 August 2016 and 24 August 2017, during which Mr Hussain was identified on certificates as the owner and staff described him as the owner, though he refused to allow inspection of the till or delivery terminals (12, 23). HMRC issued penalty notices in January, April and June 2017 for non-compliance with document requests (15, 17, 22). On 31 August 2017, HMRC wrote to Mr Hussain informing him it had decided to assess him for VAT based on available information, using figures from his income tax returns, uplifted by the retail price index, and applying the Flat Rate Scheme percentage of 12.5% for catering (25).
Mr Hussain's income tax returns showed turnover of £77,957 in 2013/2014 and £65,182 in 2014/2015, with him ceasing to trade on 31 January 2015 (34). P60 records showed subsequent employment income from YSD Trading Limited and Muta Foods Limited (36). No evidence was placed before the Tribunal that YSD Trading Limited had ever filed corporation tax returns (33), and a sub-lease agreement said to evidence the transfer of the business to YSD Trading Limited was never provided to HMRC or the Tribunal (31).
Core dispute
The issues for determination were whether HMRC correctly determined that Mr Hussain was required to be registered for VAT, and whether Mr Hussain carried on the takeaway business during the relevant period such that its turnover should be attributed to him (9).
Court findings
The Tribunal had to decide, on the balance of probabilities, whether Mr Hussain's turnover in any rolling 12-month period exceeded the VAT registration threshold (40). It found that the takeaway business, regardless of whether owned by Mr Hussain, YSD Trading Limited or Muta Foods Limited, had turnover below the VAT threshold in each relevant period (41).
The Tribunal accepted the figures in Mr Hussain's income tax returns as the best available evidence of turnover, noting these were unchallenged and were the only contemporaneous records available, even though they covered only a two-year period (42).
HMRC explained that its turnover figures were calculated by taking the income tax return figures, adding Just Eat sales, and applying a retail price index mark-up, but HMRC could not explain why Just Eat sales should be added or why other delivery platforms were treated differently (37, 43). The Tribunal found that although HMRC's assessments carry a presumption of validity, the absence of supporting workings significantly weakened HMRC's position, and it was unable to place weight on HMRC's methodology (43).
Having found the turnover did not exceed the threshold, the Tribunal considered it unnecessary to determine whether Mr Hussain personally carried on the business throughout the period, since even if HMRC were correct on that issue the turnover would not have exceeded the registration threshold (44).
Outcome
The Tribunal concluded that the turnover of the takeaway business did not exceed the VAT registration threshold at any relevant time, and that HMRC's assessments were not supported by sufficiently reliable evidence and could not be sustained (45).
The appeal was allowed, and the VAT assessments and associated penalties were set aside (46).
Major issues / areas of contention
- Whether HMRC correctly determined that Mr Hussain was required to be registered for VAT (9)
- Whether Mr Hussain carried on the takeaway business during the relevant period so that its turnover should be attributed to him (9)
- Whether HMRC's methodology for calculating turnover, including the addition of Just Eat sales and a retail price index mark-up to income tax return figures, was reliable (37, 43)
- Whether the takeaway business turnover exceeded the VAT registration threshold in any relevant 12-month period (40, 41)