Case Number: TC09471
By remote video hearing
Appeal reference: TC/2024/02223
VAT – discretion not to register trader - reasonableness
Judgment date: 3 April 2025
Before
TRIBUNAL JUDGE MCGREGOR
MS HANNAH DEIGHTON
Between
DAWN KAFFEL
Appellant
and
THE COMMISSIONERS FOR HIS MAJESTY’S REVENUE AND CUSTOMS
Respondents
Representation:
For the Appellant: Mr Barry Soraff of Raffingers Accountants
For the Respondents: Yusuf Nalla, litigator of HM Revenue and Customs’ Solicitor’s Office
DECISION
Introduction
With the consent of the parties, the form of the hearing was V (video) via Teams. A face to face hearing was not held because a remote hearing was appropriate. The documents to which we were referred are a bundle of 95 pages.
Prior notice of the hearing had been published on the gov.uk website, with information about how representatives of the media or members of the public could apply to join the hearing remotely in order to observe the proceedings. As such, the hearing was held in public.
This is the decision on an appeal by Mrs Kaffel against HMRC’s decision not to grant the appellant’s request for retrospective exception from compulsory VAT registration.
Mr Soraff was representing Mrs Kaffel on a pro bono basis. The Tribunal thanks him for his support in putting Mrs Kaffel’s case to the Tribunal in a way that Mrs Kaffel, by her own admission, would have struggled to do.
law
Under Paragraph 1(1)(a) of Schedule 1 to the Value Added Tax Act 1994 (VATA 1994) a person becomes liable to register for VAT at the end of any month if the person is UK-established and the value of their taxable supplies in the year prior to that time exceeds the threshold that applies at the relevant time. The threshold at the relevant time was £85,000.
Paragraph 1(3) of Schedule 1 to VATA 1994 provides as follows:
“A person does not become liable to be registered by virtue of sub-paragraph
(1)(a) or (2)(a) above if the Commissioners are satisfied that the value of his
taxable supplies in the period of one year beginning at the time at which, apart
from this sub-paragraph, he would become liable to be registered will not exceed [£85,000].
Under section 83(1)(a) of VATA 1994, a taxpayer may appeal to this Tribunal against HMRC’s decision about liability for registration.
Evidence and findings of fact
We heard evidence from Mrs Kaffel, whose business as a relationship counsellor is the subject of the registration decision.
We also heard evidence from Mr Kaffel, who supported his wife in an administrative capacity, in particular with regards to keeping books and records.
We also heard the evidence of Officer Stephen Hird, VAT technical officer in HMRC’s registration service.
All three were credible witnesses.
The following facts were not in dispute:
Mrs Kaffel has operated, on a sole trader basis, as a relationship counsellor for approximately 25 years;
In that time, she has, until the period relevant to this appeal, always remained under the VAT registration threshold;
Her husband, Mr Kaffel, has always helped with the administrative affairs of the business, including completing tax returns and keeping the accounts of the business;
During the COVID pandemic, demand for her services increased dramatically;
Mr Kaffel had been operating under the mistaken belief that the question of whether and when to register for VAT was based on the yearly turnover that was submitted for self-assessment;
Mr and Mrs Kaffel became aware that the VAT threshold had been breached in approximately March 2021;
Mr Kaffel then searched online about what to do and discovered that a temporary exception might be available;
He then drafted a letter requesting such temporary exception, which Mrs Kaffel sent to HMRC on 9 March 2021. In this letter, Mrs Kaffel made the following statements:
“The past year due to the covid pandemic has brought unprecedented challenges to many relationships and has increased my client case load that was not anticipated. “
“This amount of turnover is definitely temporarily and I’m asking for your acceptance to remain exempt because at 67 years of age I’m unable to continue at this pace and must slow things down. In view of this I will cutting back on my working hours from now on to a more manageable level. “
“My new financial year commences on April 1, 2021 and my income will definitely be under the threshold for VAT registration, as it has always been.”
Mrs Kaffel chased for a response to that letter (enclosing a further copy of it) on 17 May 2021;
HMRC responded to the letter on 7 February 2022, enclosing a questionnaire. The opening of the letter was as follows:
Thank you for your letter asking for an exception to VAT registration.
We need some more information to help us work out if we can give you an exception.
We need this to understand your normal trading pattern, and so we can be sure that your taxable turnover will be under the deregistration limit within 12 months of the month it went over the registration limit.
Mrs Kaffel replied, providing the information requested and the filled out questionnaire on 21 February 2022. The following answers were given to HMRC’s questions:
In response to the question concerning the reasons why the turnover exceeded the limit and whether the circumstances could be repeated, Mrs Kaffel wrote:
“As an accredited and registered member of the British Association for counselling and psychotherapy for the past 25 years, my income has always been below the VAT threshold. My practice offers face to face counselling but due to the pandemic my case load and enquiries greatly increased due to the unprecedented challenges on relationships at this time. The increase in clients seeking therapy at this time was totally unexpected and I was forced to move out of my consulting room and set up online zoom consultations because of lockdown requirements. This demand has now shown to be reducing, but this demand for my services is no longer tenable at this level and as I am approaching retirement, I will be reducing my working hours to ensure a less demanding workload.”
In response to HMRC’s question “Please explain why you thought, at the time your turnover went over the registration limit, your turnover would be back below the deregistration limit within the next 12 months”, Mrs Kaffel wrote:
“As mentioned on previous page, I have decided that I can no longer work at this pace and stress levels, approaching 70 years of age, I will be cutting down my days and hours to below the VAT threshold. My 2021/22 financial year will be below the VAT threshold.”
In response to HMRC’s question “What date did you become aware that you had breached the VAT threshold?”, Mrs Kaffel replied:
“Towards the end of my 2020/21 financial year.”
Mrs Kaffel also provided monthly turnover figures for the financial years 2018-19 through to 2021-22 (with the final two months of that year being estimates).
In a letter dated 20 July 2022, HMRC asked for further information, specifically the monthly turnover figures for February 2022 to July 2022. This was because “We need this to understand your normal trading pattern, and so we can be sure that your taxable turnover will be under the deregistration limit within 12 months of the month it went over the registration limit.”
Mrs Kaffel provided these figures on 3 August 2022.
On 16 February 2023, HMRC replied to Mrs Kaffel refusing to apply the exception to registration on the basis that she had gone over the threshold in July 2020. The reason given was:
“This is because you were not aware that the VAT Registration threshold had been breached in July 2020, therefore you were not able to put any measures in place that would ensure that your level of turnover would fall below the deregistration threshold within 12 months of the VAT threshold being exceeded. We could not have agreed in July 2020 and the 30 days after, that your taxable turnover would go below the deregistration limit by July 2021.”
This letter also offered to apply HMRC’s “Liable no longer liable” concession and suggested that this would result in an assessment for VAT, for the period from 1 September 2020 to 31 March 2022, amounting to approximately £21,000. It did not raise such an assessment.
On 14 March 2023, Mr Soraff, who had by then been appointed to assist, wrote a letter to HMRC in which, amongst other matters, he:
Explained that a figure for the self-employment income support scheme (SEISS) receipt had been mistakenly included in the revenue figures provided and that therefore the actual date the registration threshold was breached was October 2020, rather than July; and
Requested a reconsideration of the decision based on Mrs Kaffel’s awareness at that date, not July 2020;
Requested a review by an independent HMRC officer.
On 27 October 2023, HMRC requested further information about the SEISS receipt and evidence of Mrs Kaffel’s highest invoices of both purchases and sales made during the assessment period.
On 3 November 2023, Mr Soraff wrote a letter in response complaining that the letter of 27 October had been very late, had failed to respond to the requests made in the taxpayer’s letter and had asked for information that either HMRC already had or was irrelevant to the consideration;
On 23 November 2023, Officer Hird sent a reply which apologised for the previous letter and confirmed that it should not have been sent. It went on to explain that:
He agreed that the correct effective date of registration was 1 December 2020 (having taken into account the removal of the SEISS figure);
He had conducted a review of the case and concluded that an exception could not be granted because: “you have failed to demonstrate that you were monitoring your taxable turnover. It is noted according to what you have stated you were not aware of how VAT turnover was calculated until your accountant checked this therefore you were not aware you had breached the VAT registration threshold until around March 2021. When considering cases for exception from VAT registration we can only consider what was known at the time the breach of the VAT registration occurred including the 30 days after the breach when a trader is required to register for VAT. Therefore, it is considered that you could not have put any measures in place to ensure your taxable turnover was below the VAT Threshold within 12 months. It is further noted that although when you wrote in to request an exception from VAT registration in March 2021 you did in fact remain over the VAT deregistration threshold until March 2022 which is 15 months from the date of EDR.”
On 29 February 2024, the review conclusion letter was sent, upholding the original decision.
On 26 March 2024, Mrs Kaffel appealed to this Tribunal.
While there had been some earlier confusion as to the correct dates, both HMRC and Mrs Kaffel now accept that she exceeded the VAT registration threshold in October 2020 and that the correct effective date of registration would have been 1 December 2020.
parties arguments
Mr Soraff, on behalf of Mrs Kaffel, submits that HMRC’s decision concerning the exercise of the discretion was made based on incorrect information. The officer relied upon the incorrect belief that the Appellant had breached the VAT registration threshold in July 2020 but had been unaware of that fact at the time and could not therefore have put any measures in place to ensure that the turnover would fall below the deregistration threshold within 12 months of exceeding the threshold. This assessment was not revisited based on the correct date of October 2020.
He submits that a taxpayer is not required to put measures in place to reduce their turnover. A trader only needs to have a reasonable belief that the turnover would return below the deregistration threshold in the next 12 months. Mrs Kaffel did have a reasonable belief because of her experience of running her practice for 25 years and never going over the threshold, coupled with her plans to retire.
Mr Soraff also submitted that she is not required by law to have taken an assessment as at October 2020 that she needed to cut down. He submits rather that the requirement is that if she had made the assessment at that time, she would have made the decision to cut down at that point.
He further submits that HMRC is not entitled to take into account that the letter requesting the exercise of discretion was late as taxpayers should not be disadvantaged by the late notification.
Finally, he submits that HMRC cannot have exercised their discretion properly because they did not ask for evidence of Mrs Kaffel’s plans to go below the threshold.
HMRC submits that Mrs Kaffel exceeded the registration threshold in October 2020 and was required to register with an effective date of 1 December 2020.
HMRC submits that, while it is possible for a taxpayer to make a request for the exercise of discretion not to register at any time, HMRC can only base their decision on the facts that were known at the point in time when the Appellant became liable to register for VAT. They relied on the decision of the Special Commissioners in Nash v HMC&E [1997] Lexis Citation 805 and Geoffrey Lane v HMRC [2016] UKFTT 7.
HMRC accepts that the taxpayer believed in March 2021 that the turnover would be below the threshold by the end of financial year ending 31 March 2022, HMRC did not have any evidence that she had the same belief in October 2020. Further the comments made in the March 2021 letter about cutting down hours were forward looking from that point.
HMRC submits that the Appellant could not have reasonably satisfied them, at the time the Appellant became liable to register for VAT, that the value of their taxable supplies in the period of one year beginning at the date their turnover exceeded the compulsory VAT registration threshold.
discussion
It is clear from the words in paragraph 1(3) to Schedule 1 to VATA 1994, specifically “if the Commissioners are satisfied” that it is HMRC who have to be satisfied that the turnover will return to below the threshold in the following 12 months, not the taxpayer.
There are a number of cases concerning the application of this paragraph and HMRC’s discretion under it. Paragraph 26 of Nash reads as follows:
Paragraph (3) is perfectly clear that the Commissioners are required to make a forward judgment. The judgment is to be exercised at the date of transfer. It cannot be right that a taxpayer, by failing to comply with his legal obligations, can put himself into an advantageous position by expecting the Commissioners to take into account matters which they would not have been able to take into account had they been making their judgment at the correct time. The test which the Commissioners apply must be the same test and must use the same facts whenever they are asked to apply it.
Paragraph 56 of Lane v HMRC [2016] UKFTT 7 reads as follows:
The Tribunal concludes that para 1(3) should be construed with reference to sub-para 1(1)(a), and the Commissioners' decision is to be made referential to the time when the trader would become liable to be registered. We therefore adopt the approach in Nash in respect of the setting of the relevant date for a para 1(3) decision. In Mr Lane's case, the liability to register arose at the end of October 2013 and is the relevant date for the Commissioners' para 1(3) decision, and is indeed the date used by the Commissioners in his decision letter, and in HMRC's Statement of Case.
Paragraph 24 of Renforth v HMRC [2016] UKFTT 245 sets out:
The case law principles relevant to this appeal are:
The Commissioners make a para 1(3) decision with reference to a particular set of affairs existing at the relevant date, and that is the date when registration threshold is breached and triggers the liability to register for VAT.
The Commissioners make a para 1(3) decision by looking forward and considering on a prospective basis whether or not they are satisfied that the value of the trader's taxable supplies for that period will not exceed the deregistration limit.
The test which the Commissioners apply must be the same test and must use the same facts whenever they are asked to apply it. This is to preclude a late application of exception from obtaining an unfair advantage over a timely application by being able to provide facts as ascertained which would otherwise have been mere estimates.
The legislation does not prescribe a set of criteria which, if satisfied, lead to a particular result. The legislation says that a certain conclusion will follow if the Commissioners are satisfied that a particular set of affairs exists. The Commissioners have discretion to take into account relevant factors in reaching a decision on exception that is in alignment with other provisions in the statute.
The Tribunal can only interfere with the decision of the Commissioners if it is shown that the decision is one which no reasonable body of Commissioners could reach. The auxiliary verb 'can' connotes the curtailment of jurisdiction to only instances where the reasonableness test is not met.
While none of these decisions are binding on us, we respectfully adopt the approach taken in them, in particular the clear principles set out in Renforth.
We decided that, as a matter of fact, the decision which reflected HMRC’s exercise of discretion was the one made by Officer Hird in November 2023. We do not accept Mr Soraff’s submission that HMRC failed to revisit the position once it was clear that the relevant date was in October not July 2020.
Officer Hird’s evidence, supported by the letter in which he explained his decision, showed that the reason he decided not to exercise the discretion was because he considered that Mrs Kaffel had been unaware that she had gone over the threshold until March 2021 and he therefore considered that she cannot have put in place measures to ensure her turnover went below the threshold within 12 months of October 2020.
As noted above, there are temporal limits on what HMRC can take into account when considering their discretion – they must focus on the date that the registration threshold was breached and the period of 30 days thereafter. While Mr Soraff is right to point out that there is nothing in the legislation that requires a taxpayer to show a set of specific measures put in place to reduce their turnover, we also consider that the absence of such measures is a reasonable factor to take into account when considering whether to exercise the discretion. Mrs Kaffel’s personal belief that the revenue would return to normal levels is not the test here either, it is for HMRC to believe that it will, on a reasonable basis.
Further, we note that the questionnaire sent by HMRC explicitly asked the question “Please explain why you thought, at the time your turnover went over the registration limit, your turnover would be back below the deregistration limit within the next 12 months”. In our view, this is HMRC’s attempt to avail itself of the relevant information to conduct its assessment of the position.
Therefore we do not accept, as submitted by Mr Soraff, that HMRC had not asked the right questions and given Mrs Kaffel an opportunity to provide evidence of her planned changes. In fact, further, although that questionnaire was only provided to Mrs Kaffel on 7 February 2022 and filled out on 21 February 2022, her response continued to refer to future plans to cut down her workload.
We do not consider that HMRC have taken into account irrelevant factors in reaching their conclusion or failed to take into account another relevant factor that was available at the time the registration threshold was breached.
Therefore we cannot disturb HMRC’s decision not to exercise their discretion in Mrs Kaffel’s favour.
disposition
For the reasons set out above, we dismiss Mrs Kaffel’s appeal.
Right to apply for permission to 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.
Release date: 03rd APRIL 2025