Steven Hall v The Commissioners for HMRC

This appeal, pursuant to Section 83(1)(a) Value Added Tax Act 1994 (‘VATA 1994’), is against the decision made by the Respondents (‘HMRC’) on 6 August 2024 to register the Appellant, Mr Hall, for VAT for the period December 2011 to 25 August 2022.

The Tribunal’s decision, allowing the appeal, was given orally at the end of the hearing. HMRC requested full reasons for that decision, which are set out below.

The hearing lasted 1 day. The documents to which we were referred were contained in the 1037-page hearing bundle, which included tribunal documents, correspondence, bank statements, invoices and legal authorities.

Mr Hall operated as a self-employed hairdresser and was registered for VAT until October 2011. Following deregistration, he continued operating his salon, claiming that his turnover remained below the VAT threshold and that he had adopted a ‘rent-a-chair’ model with another stylist. In July 2021, HMRC initiated a VAT compliance check and concluded that the arrangement did not meet the criteria for a rent-a-chair model as outlined in their internal guidance, VAT Taxable Person Manual (at VTAXPER68500).

Mr Hall appeals this conclusion on the ground that his turnover was below the VAT threshold and that HMRC’s income tax self-assessment (‘SA’) enquiry confirmed this after examining all records and rent-a-chair income. He contends that HMRC’s VAT Officer later disregarded that conclusion, contradicting HMRC guidance (at VTAXPER68900), which requires consistent treatment for tax and VAT. Mr Hall disputes HMRC’s claim that the income tax enquiry remains open, since closure was confirmed in August 2023.

The issues to be determined are:

If we conclude that HMRC have not correctly determined that Mr Hall should have been registered for VAT for the relevant period, we need not consider whether HMRC were correct to determine that the income from the stylist should be included in Mr Hall’s turnover for VAT purposes.

Paragraph 1(1)(a) of Schedule 1 to VATA 1994 provides that a person who makes taxable supplies but is not registered becomes liable to be registered at the end of any month, if the person is UK-established and the value of his taxable supplies in the period of one year then ending has exceeded the relevant threshold.

Section 83(1)(a) of VATA 1994 provides that an appeal shall lie to this tribunal with respect to the registration of any person.

The reasons for the decision to register Mr Hall are set out in the witness statement of HMRC Officer, Liam Twyford. In that statement, Mr Twyford states:

“14.

On 21 August 2023, I sent the (incorrect) intending assessment for VAT outlining that I believed that the Appellant should have continued to be VAT registered as the self-employed stylist appeared to be making a supply to the salon and the salon then making an onward supply to customers, thus meaning all the income the salon makes was the Appellants and therefore continued to trade about the VAT registration period. This included the line “To confirm, my colleague Michael Power has advised that he is now closing the income tax compliance check and no additional tax is due in relation to this”. This line was intended to confirm to the customer that there was not going to be an income tax assessment to follow. A formal notice of closure was not issued.

…

18.

On 19 October 2023, I sent a further reply advising that I would move the case to formal assessment so that the assessment decision could be officially appealed. I explained that the profit would remain the same for income tax as whilst there was now a greater amount of income for Mr Hall to declare. The stylist would also be an allowable expense for income tax meaning a net position.”

In his email correspondence of 22 December 2021, Mr Twyford states that Mr Hall “will be receiving a letter officially opening a review of his Self-Assessment returns” and that this will be conducted along with the VAT enquiry “to fully understand Mr Hall's tax position”.

In his testimony given during the hearing, Mr Twyford stated that his compliance check related solely to VAT and not to income tax, and he did not intend to make any changes to income tax. He said that his August 2023 letter reflected his attempt to clarify matters concerning the income tax position, as he believed the VAT adjustment would simply be netted off and might result in an income tax repayment. His understanding was that the SA enquiry was still ongoing and his August 2023 letter was intended to signal the direction of travel. He stated that it was not unusual for a VAT enquiry to proceed independently without affecting income tax, but that all taxes should be treated consistently, and if the income tax officer had confirmed no change to turnover, he would not have made the VAT assessment.

In their statement of case, HMRC set out that they “incorrectly stated that the income tax compliance check will be closed” and that a “formal closure notice was not issued”. They submit that their letter of 21 August 2023 was in error, as it prematurely indicated closure of the SA check without accurately reflecting the position, that they upheld that part of Mr Hall’s complaint, apologised for this mistake and offered an ex-gratia payment, and that they reiterated in their complaint response, and again in their review conclusion letter dated 17 December 2024, that the income tax SA compliance check remains open.

Although Mr Hall asserts the SA check was concluded, HMRC contends that he was informed on four occasions that it remains open. They argue that the Tribunal’s jurisdiction is limited to statutory rights of appeal under the Tribunals, Courts and Enforcement Act 2007 and the relevant taxing statutes, and does not extend to matters of HMRC conduct, which should be pursued through the complaints process or the Adjudicator’s Office.

HMRC further contends that Mr Hall was told no further income tax would be due to reassure him that no large assessments were pending. However, following advice from their senior technical team, HMRC decided that, as part of the compliance check, the SA should be amended to reflect the VAT adjustment, which would result in a repayment to Mr Hall. They submit that such changes will only occur if the VAT decision stands, because VAT assessments must be issued first before any income tax adjustments can be made, and that when the SA enquiry was opened, they initially believed that increasing turnover and allowing the stylist’s expense would have no net effect on tax due, so no changes were planned. Later, following technical advice, they concluded that if the VAT decision was correct, the SA should be adjusted to account for the VAT, creating a repayment. HMRC’s position is that it would be imprudent to make such changes before the VAT decision is final, and therefore the order of assessments must follow this sequence.

Regarding the alignment of income tax and VAT, HMRC’s position as set out in their statement of case is:

“55.

The Appellant is correct when referring to VTAXPER68900 which states: “a trader cannot portray himself in one way for income tax purposes, but in another way for VAT purposes”. Consequently, the SA and the VAT need to align. The SA needs to reflect the revised turnover in line with the VAT findings and the business expenditure originally claimed for SA, will have included the VAT. Therefore, the SA check remains open. The Respondents intention is to correct the SA returns in line with the turnover in the VAT assessments. The VAT due will be deducted to get to the net turnover figure for SA purposes. This may result in a repayment position for Self- assessment.”

In reaching our conclusion on whether HMRC have correctly determined that Mr Hall should have been registered for VAT for the period 1 December 2011 to 25 August 2022, we have considered Mr Tywford’s evidence that if the income tax enquiry had been closed without adjustment he would not have made the VAT assessment. We have also considered that there is no dispute between the parties that a trader cannot portray himself in one way for income tax purposes but in another way for VAT purposes, and the parties agreement that the income tax and VAT treatment need to align.

We are mindful, as HMRC submit, that the appeal before us concerns the VAT registration and not closure of the income tax enquiry or a complaint about HMRC’s behaviour. However, the clear position of the parties on the alignment of the taxes means that if we find that the income tax enquiry was in fact closed without adjustment, the inevitable consequence of that finding is that the VAT registration decision is incorrect.

HMRC’s letter of 21 August 2023 states: “To confirm, my colleague Michael Power has advised that he is now closing the income tax compliance check and no additional tax is due in relation to this.”

To determine whether the income tax enquiry was in fact closed by way of this letter, we have considered that an enquiry is completed when an officer of HMRC informs the taxpayer by notice that the officer has completed his enquiries and states that in the officer’s opinion no amendment of the return is required, or makes amendments of the return required to give effect to his conclusions (see section 28A Taxes Management Act 1970). We have also considered that no formality is prescribed for the notice (see Portland Gas Storage Ltd v HMRC [2014] UKUT 0270 (TCC) at [51]) and we therefore reject HMRC’s submission that there was no closure because the letter was not a “formal closure notice”.

We consider HMRC’s letter of 21 August 2023 informs Mr Hall by notice that the officer has completed his enquiries and states that in the officer’s opinion no amendment of the return is required and therefore amounts to the issue of a closure notice, which is an irrevocable step (see HMRC v Tower MCashback LLP [2008] EWHC 2387 (Ch) at [128]). We do not accept HMRC’s submission that the enquiry remains open because the letter was incorrect, an error, premature, inaccurate, or because they have repeatedly stated that the enquiry remains open.

It is our conclusion that the income tax enquiry was in fact closed without adjustment and, in accordance with the need for alignment, the decision to register Mr Hall for VAT is incorrect.

Having determined that Mr Hall should not have been registered for VAT for the relevant period, we need not consider whether HMRC were correct to determine that the income from the stylist should be included in his turnover for VAT purposes.

For the reasons set out above, we allow this appeal.

This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be received by this Tribunal not later than 56 days after this decision is sent to that party. The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.