Julian & Anor v The Commissioners for HMRC

The form of the hearing was V (video). All parties attended remotely and the hearing was held on the Teams platform. The documents to which we were referred were included in a document bundle of 214 pages. At the hearing Mr Julian referred to a Statement of Case for the Appellants, which he had prepared, and witness statements made by Mrs Julian, Mr Ben Julian (the Appellants’ son) and Mrs Heidi Hands (their accountant). These documents had been sent to the Tribunal and HMRC but had been omitted from the bundle. With the agreement of Mr Olamide, we admitted these documents and heard oral evidence from the witnesses.

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.

We announced our decision at the end of the hearing and Mr Olamide requested a full decision which we set out below.

This is Mr and Mrs Julian’s appeal against penalties of £43,438 for failure to notify liability to register for VAT. The penalties relate to the period 1 March 2021 (when the obligation to register arose) to 24 April 2023, when the business applied for registration and are charged under Schedule 41 Finance Act 2008 (Schedule 41).

Mr and Mrs Julian acknowledged that they should have registered for VAT earlier than they did. The amount of VAT arrears was agreed. As it was a very substantial amount, they concluded a time to pay agreement with HMRC but managed to pay the sum due off early.

HMRC issued the penalty assessment on 17 September 2024. The penalty amount of £43,438 was the minimum amount allowed under Schedule 41as the notification of liability to register for VAT was unprompted and the Appellants cooperated fully with HMRC to resolve the issue. The Appellants do not contest the validity or amount of the penalty.

The sole issue for us to decide is whether the Appellants had a “reasonable excuse” for failing to notify their liability to register, in which case they are not liable for the penalty (paragraph 20 of Schedule 41).

For the reasons set out below, we found that they did have a reasonable excuse.

The Julian Partnership is a family partnership comprising Mr and Mrs Julian, their son Ben and his wife, Zoe, and Mr and Mrs Julian’s daughter. The daughter does participate in the business. Mr and Mrs Julian are now retired, and Ben and Zoe have day to day responsibility for running the farming business. They rent approximately 35 acres of land from the Duchy of Cornwall on the small island of St Martin’s in the Isles of Scilly. Here, they grow flowers outdoors all year round, which they sell as gifts and post to customers. They also operate two cottages as holiday lets and have a small herd of beef cattle.

When Mr and Mrs Julian moved to St Martin’s and began the farming business in 1987, they registered for VAT. In 1995 they became aware of the Agricultural Flat Rate Scheme (AFRS) which is an alternative to VAT registration designed to reduce the administrative burden on smaller agricultural businesses. Participating farmers apply a 4% addition to qualifying sales to VAT-registered customers but do not claim input tax.

The partnership de-registered for VAT and from 1995 onwards they held an AFRS Certificate. The Appellants operated the scheme for over twenty-five years, during which there were only a few minor changes. The scheme is not widespread and in 2017 it was used by fewer than 2,000 farmers.

In the Spring Budget in 2020 it was proposed to change the AFRS, in particular, to apply entry and exit criteria. A business would become ineligible for the scheme, broadly, if the total value of taxable supplies in the period of one year ending on the certificate anniversary is more than £230,000. The changes were made by The Value Added Tax (Amendment) Regulations 2020 which amended regulation 206 of the Value Added Tax Regulations 1995 and inserted a new regulation 206A. Regulation 206 empowers HMRC to withdraw the AFRS certificate in certain circumstances, including where supplies exceed the limit, and Regulation 206A imposes an obligation on a user of the scheme to notify HMRC if the £230,000 threshold was breached. The changes came into effect on 1 January 2021.

There was very little publicity about these changes. They were not set out in the Finance Act itself. They did not appear to have been contained in the Budget press releases issued by HMRC and the Treasury. Mr Olamide was unable to help us with the source of the announcement of the changes.

The Appellants were unaware of the changes. They were farmers and had no expertise in tax. They had employed Mrs Heidi Hands of Chandlers Accountants since 2012 and she had diligently completed their partnership accounts and partnership returns and dealt with their tax affairs.

Mrs Hands was a generalist at a small accountancy firm based in Penryn, Cornwall. She recognises that staying abreast of changes in tax law is an essential and important part of her job. She regularly reads publications issued by her professional body, subscribes to online publications and attends relevant webinars and seminars. Despite this, she was unaware of the changes to the AFRS.

She became aware of them by chance in April 2023 when she was researching other farming reliefs.

The Appellants’ supplies were in excess of the threshold.

Mrs Hands immediately informed the Julians and they promptly instructed her to contact HMRC in order to:

The Appellants also instructed Mrs Hands to calculate the VAT due and arrange for payment. The VAT arrears due were agreed at more than £500,000. HMRC agreed a 20 month Time to Pay agreement. Mr and Mrs Julian used a large sum from their retirement savings to make a loan to the partnership which enabled it to pay off the VAT debt in just 12 months.

HMRC wrote to Mr and Mrs Julian on 29 April 2024 to say they intended to charge a penalty. The proposed penalty was the minimum possible (10% of the Potential Lost Revenue) on the basis that the failure to notify was non-deliberate, the disclosure was unprompted and the Julians had cooperated fully with HMRC. Even so, the penalty amounted to £43,438.

The penalty assessment was issued on 17 September 2024.

Mrs Hands requested a review on 2 October 2024. The review conclusion letter of 28 January 2025 upheld the original decision.

The Appellants notified their appeal to the Tribunal on 19 February 2025.

The Appellants appeal on the grounds that:

HMRC submits:

There is much case law on the scope of “reasonable excuse”. Each case turns on its facts and is not of general assistance. There are however some well-known cases which set out the principles which this Tribunal should apply when considering whether a taxpayer has a reasonable excuse.

In the case of The Clean Car Company Ltd v The Commissioners of Customs and Excise [1991] VATTR 234, Judge Medd said:

“One must ask oneself: was what the taxpayer did a reasonable thing for a responsible trader conscious of and intending to comply with his obligations regarding tax, but having the experience and other relevant attributes of the taxpayer and placed in the situation that the taxpayer found himself at the relevant time, a reasonable thing to do? Put in another way which does not I think alter the sense of the question: was what the taxpayer did not an unreasonable thing for a trader of the sort I have envisaged, in the position the taxpayer found himself, to do?”

The Upper Tribunal provided further guidance for this Tribunal in the case of Perrin v HMRC [2018] UKUT 156 (TC). At [81], the Tribunal said:

“81.

When considering a “reasonable excuse” defence, therefore, in our view the FTT can usefully approach matters in the following way:

(1)

First, establish what facts the taxpayer asserts give rise to a reasonable excuse (this may include the belief, acts or omissions of the taxpayer or any other person, the taxpayer’s own experience or relevant attributes, the situation of the taxpayer at any relevant time and any other relevant external facts).

(2)

Second, decide which of those facts are proven.

(3)

Third, decide whether, viewed objectively, those proven facts do indeed amount to an objectively reasonable excuse for the default and the time when that objectively reasonable excuse ceased. In doing so, it should take into account the experience and other relevant attributes of the taxpayer and the situation in which the taxpayer found himself at the relevant time or times. It might assist the FTT, in this context, to ask itself the question “was what the taxpayer did (or omitted to do or believed) objectively reasonable for this taxpayer in those circumstances?”

(4)

Fourth, having decided when any reasonable excuse ceased, decide whether the taxpayer remedied the failure without unreasonable delay after that time (unless, exceptionally, the failure was remedied before the reasonable excuse ceased). In doing so, the FTT should again decide the matter objectively, but taking into account the experience and other relevant attributes of the taxpayer and the situation in which the taxpayer found himself at the relevant time or times.”

The Tribunal in Perrin also provided guidance on the oft quoted assertion that “ignorance of the law is no excuse”. At [82] it said:

“82.

One situation that can sometimes cause difficulties is when the taxpayer’s asserted reasonable excuse is purely that he/she did not know of the particular requirement that has been shown to have been breached. It is a much-cited aphorism that “ignorance of the law is no excuse”, and on occasion this has been given as a reason why the defence of reasonable excuse cannot be available in such circumstances. We see no basis for this argument. Some requirements of the law are well-known, simple and straightforward but others are much less so. It will be a matter of judgment for the FTT in each case whether it was objectively reasonable for the particular taxpayer, in the circumstances of the case, to have been ignorant of the requirement in question, and for how long. The Clean Car Co itself provides an example of such a situation.”

In essence, the Appellants contend that they had a reasonable excuse for their failure to notify their liability to register for VAT as they, and their accountant, were unaware of the major changes to the AFRS scheme and it was not reasonable to expect them to be aware of those changes.

We applied the tests set out in The Clean Car Company Ltd and Perrin.

We have no doubt that Mr and Mrs Julian were “responsible trader[s] conscious of and intending to comply with [their] obligations regarding tax…”.

They were farmers, not tax experts. St Martin’s is remote and isolated and there were no other nearby farmers from whom they might have found out about the changes. They properly and responsibly employed an accountant to help them meet their obligations.

Mrs Hands was a competent accountant who recognised her responsibility to keep up to date with developments in tax and who took appropriate steps to do so. She was in a small firm carrying out general accountancy work. She was not a specialist in farming tax, nor did she have specialist resources within the firm in the way a large accountancy firm would have.

We find as a fact that neither the Appellants nor Mrs Hands were aware of the changes to the legislation.

We agree with Mr Olamide that HMRC cannot be expected to notify every taxpayer of changes to the law which might affect them. We note that there have been major information campaigns in relation to changes which affect large numbers of people, such as Making Tax Digital and the High Income Child Benefit Charge and this is a positive development. It might have been relatively easy for HMRC to notify the small number of participants in the AFRS about the changes, but they were not obliged to do so and did not. The taxpayer is responsible for his own tax compliance.

We also agree with Mr and Mrs Julian that it is unreasonable and unrealistic to expect taxpayers, or their agents, to trawl through HMRC’s website on the off chance they might come across something which is relevant to their tax position. It is equally unreasonable and unrealistic to expect taxpayers, or their agents, to contact HMRC from time to time to enquire (if they ever manage to get through on the telephone) whether there is anything new they need to know.

It is clear from Perrin that lack of knowledge of particular tax requirements can, in appropriate circumstances, constitute a reasonable excuse. As the Upper Tribunal said, at [82]:

“It will be a matter of judgment for the FTT in each case whether it was objectively reasonable for the particular taxpayer, in the circumstances of the case, to have been ignorant of the requirement in question, and for how long.”

The changes to the AFRS were not contained in the Finance Bill or Act nor, so far as we can see, were they the subject of a separate announcement. The intention to change the rules was mentioned in a brief paragraph buried within the OOTLAR, a 67-page document published online at the time of the Budget, along with a further 43 pages of Annexes. The changes themselves were effected by Regulation.

On the web page with the links to the OOTLAR, it stated:

“This document lists the tax policy measures announced at Budget 2020 and shows when they will be legislated. It also includes links to all of the tax information and impact notes, the rates tables and a table of upcoming tax consultations.

It is intended for tax practitioners and others with an interest in tax policy changes, especially those who will be involved in consultations both on the policy and on draft legislation.”

In other words, this very significant change to the AFRS was hidden away in a document aimed at specialists involved in tax policy who engage with HMRC on the policy and help to shape the legislation. It is entirely reasonable that an ordinary taxpayer should be unaware of this publication and it is also reasonable that a generalist accountant in a small firm should be equally unaware of it.

Having missed the new rules at the outset, it was only by chance that Mrs Hands became aware of them. As soon as she did know (at which point the reasonable excuse ceased) she informed the Julians and they promptly instructed her to remedy the matter, which she did.

Having regard to the fact that Mr and Mrs Julian were responsible taxpayers and taking into account their experience and attributes and those of Mrs Hands, we have asked ourselves the question “was what the taxpayer …omitted to do…objectively reasonable for this taxpayer in those circumstances?”

For the reasons set out above, we have concluded that it was indeed objectively reasonable in the circumstances for Mr and Mrs Julian to have been unaware of the obligation to register for VAT.

Accordingly, we find that they had a reasonable excuse for failing to notify their liability to register for VAT.

We have concluded that Mr and Mrs Julian had a reasonable excuse for failing to notify their liability to register for VAT and, accordingly, we allow their appeal against the penalty issued under Schedule 41.

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.