18965
Value added tax – liability to be registered – para 1(1) Schedule 1 VATA – taxpayer carrying on two businesses as sole trader – whether supplies of two businesses aggregated for purposes of determining whether taxable supplies exceed registration limit – yes – CCE v Glassborow applied –whether assessment made to best judgment – s 73(1) VATA – yes – whether any basis for reducing assessment – no – misdeclaration penalty – s 63 VATA – whether reasonable excuse where taxpayer relied on advice – no – s 71(1) VATA – CCE v Harris applied - appeal dismissed

LONDON TRIBUNAL CENTRE

	JEFFREY BOGGELN (trading as Divine Fireplaces)	Appellant

	- and -

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

Tribunal:	EDWARD SADLER (Chairman)
					SHEILA EDMONDSON FCA

Sitting in public in London on 20 January 2005

The Appellant did not appear and was not represented 

Caroline Neenan, counsel, instructed by the Solicitor for the Customs and Excise, for the Respondents

Appeal heard in the absence of the Appellant under Rule 26 (2) of the Value Added Tax Tribunals Rules 1986

© CROWN COPYRIGHT 2005

DECISION

The Appeal and the decision
1.	This is an appeal by Mr Jeffrey Boggeln (“the Appellant”) against a Notice of Assessment to VAT dated 27 August 2003 issued by the Commissioners of Customs and Excise (“the Commissioners”) in the sum of £29,970 plus interest of £101.40.  In addition, the Commissioners have issued a Notice of Assessment of Misdeclaration Penalty dated 4 September 2003 in the sum of £4,495.  The misdeclaration penalty was issued pursuant to section 63 of the Value Added Tax Act 1994 (“VATA”) on the grounds that the Appellant made a VAT return which understated his liability to VAT.
2.	The Appellant also appealed against a Notice of Assessment to VAT dated 9 October 2003 issued by the Commissioners in the sum of £806 plus interest of £8.92 and a Notice of Increased Misdeclaration Penalty dated 10 November 2003 whereby the original penalty was increased from £4,495 to £4,616.  However, in the course of the hearing the Commissioners announced that they were withdrawing this second Notice of Assessment and also the increase in the penalty, so that the Appellant’s appeal to the tribunal for decision relates to the assessment and penalty as specified in para. 1 above.
3.	The Appellant has carried on two distinct businesses as a sole trader: a retail fireplace business trading under the name “Divine Fireplaces” and a contract cleaning business trading under the name “J M Cleaning”.  The Commissioners argue that the Appellant was liable to be compulsorily registered for VAT purposes with effect from 1 July 2000 since at that date the combined taxable supplies of the two businesses carried on by the Appellant exceeded the VAT registration threshold.  In the absence of any VAT returns by the Appellant showing taxable supplies, and also in the absence of business records for the businesses the Commissioners proceeded to issue an assessment to the best of their judgment under the provisions of section 73(1) VATA.  Following visits to the Appellant where the Commissioners advised the Appellant of his liability to register and make VAT returns, and his subsequent failure to register from the date he became liable, in their view, to do so, and the Appellant’s failure to make a return of VAT due from the date he became liable to register, the Commissioners issued a misdeclaration penalty under the provisions of section 63 VATA.
4.	The grounds of the Appellant’s appeal are that he was advised that his two businesses should not be linked for VAT purposes, and that, taken separately, neither business has made taxable supplies in excess of the threshold requiring compulsory registration.  The Appellant also argues that the amounts of VAT assessed are excessive in that they exceed the profits of the businesses.
5.	Whilst, for the reasons we mention below, we have some sympathy with the circumstances of the Appellant, the law as it applies to him is clear.  We dismiss his appeal on the grounds that the Commissioners are correct in law to treat his two businesses as one for the purposes of determining the amount of his taxable supplies and thereby his liability to register for VAT.  We also decide that the assessment made was made to the best of their judgment by the Commissioners, and that there was no evidence before us which could lead us to conclude that the amount of the assessment should be reduced.  We further decide that the misdeclaration penalty was properly issued in the circumstances where the Appellant, although notified of his liabilities by the Commissioners, failed to declare VAT due, and although the Appellant claimed that he was acting on advice in failing to declare any VAT, that is not a reasonable excuse such as would entitle us under the relevant legislation to set aside the penalty. 
Hearing the appeal in the absence of the Appellant and the Appellant’s right to apply to the tribunal for our decision to be set aside 
6.	When the appeal was called on for hearing the Appellant did not appear, either in person or by his representative.  The start of the hearing was delayed to give the Appellant time to appear.  The clerk showed us the tribunal office file, from which it was apparent that recent papers relating to the hearing, sent to the address of the Divine Fireplaces business (from which the Appellant had sent his Notice of Appeal), had been returned with a note from the landlord of those premises to the effect that the Appellant’s lease of those premises had been terminated.  We were also advised by Miss Neenan, who appeared before us for the Commissioners, that the solicitor responsible for this case at the Commissioners’ office had tried to reach the Appellant by telephone on the day previous to the hearing using the telephone number on his file, but that the call had registered as “number unavailable”.
7.	We decided in these circumstances to proceed to consider the appeal in the absence of the Appellant under Rule 26(2) of the Value Added Tax Tribunals Rules 1986, taking the Appellant’s case to be as set out in his Notice of Appeal and also his letter to the Commissioners seeking reconsideration of their decision to register him compulsorily for VAT purposes (that letter is undated, but is stamped with a “date received” by the Commissioners of 20 June 2003).
8.	The Appellant has the right, under Rule 26(3) of the Value Added Tax Tribunals Rules, to apply to the tribunal to set aside our decision, provided such application is served at the London tribunal centre within 14 days after the date when our decision is released.
The issues
9.	The issues we are required to decide can be summarised as follows:-
(1)	Whether the Appellant was liable to register for VAT with effect from 1 July 2000, as the Commissioners contend – the issue between the parties here is, in effect, whether the two quite different and distinct businesses carried on by the Appellant should be covered by one registration so that the value of the aggregate supplies of the two businesses taken together determines whether (and if so, when) the compulsory registration threshold is reached;
(2)	If the Appellant was so liable to register for VAT, whether the assessment made on him by the Commissioners in the absence of records necessary to verify the returns made by the Appellant was made by the Commissioners to the best of their judgment, and if so, whether nevertheless there is evidence before us which requires us to reduce the amount of VAT assessed; and
(3)	Whether the Appellant is in principle liable to a misdeclaration penalty by reason of having made a return which understates, to the extent specified in section 63 VATA, his liability to VAT, and, if he is so liable in principle to a penalty, whether the Appellant nevertheless has a reasonable excuse for having made such a return so that the penalty can be set aside, or, alternatively, whether the circumstances are such that we have the right to reduce the penalty in mitigation – and if we have that right, whether we should exercise it in this case.
The evidence and the facts
10.	We had before us in evidence a bundle of documents prepared by the Commissioners in advance of the hearing.  This comprised (in addition to the Appellant’s Notice of Appeal and the Commissioners’ Statement of Case) copies of the following:-
(1)	 An undated letter from the Appellant to the Commissioners (stamped as received by the Commissioners’ Post Room on 20 June 2003) setting out his reasons why in his view no VAT is due and, in effect, requesting the Commissioners to reconsider their decision to register compulsorily the Appellant (“the Appellant’s June 03 Letter”);
(2)	A letter dated 18 August from the Commissioners to the Appellant in reply to the Appellant’s June 03 Letter;
(3)	A form VAT 1 (Application for Registration) completed and signed by the Appellant and dated 27 February 2003 in which the Appellant applies to become registered for VAT purposes with effect from 1 March 2003;
(4)	Notice of Assessment issued to the Appellant by the Commissioners dated 27 August 2003 in the sum of £29,970 for underdeclared VAT plus interest of £101.40.  The assessment is shown to relate to the period of three years from 1 July 2000 to 30 June 2003;
(5)	Notice of Assessment of Misdeclaration Penalty issued by the Commissioners dated 4 September 2003 in the sum of £4,495 (at the penalty rate of 15% applied to the VAT assessed of £29,970, with nil mitigation).
11.	We heard evidence from Mr Robert William Nex, the Senior Officer of the Commissioners who had investigated the Appellant’s affairs and who instigated the compulsory registration of the Appellant and calculated the figures used in the disputed Notice of Assessment (the actual Notice was issued by a separate department of the Commissioners).  At the hearing Mr Nex handed up a witness statement of his evidence and documents in support of his evidence, namely, copies of the following:-
(1)	A Report Mr Nex had made of his visit to the Appellant’s business premises on 12 February 2003, including a schedule showing bank deposits made into an account in the name of J M Cleaning for each of the months May 2002 to January 2003 and a further schedule showing bank deposits made into an account in the name of Divine Fireplaces over the period 1 May 2002 to 27 January 2003;
(2)	Mr Nex’s letter to the Appellant dated 17 February 2003 summarising Mr Nex’s findings from his visit and attaching a schedule of estimated monthly turnover of the Appellant’s two businesses showing the VAT supply threshold exceeded by the end of November 1999;
(3)	A spreadsheet headed “Jeffrey Boggeln, T/A J M Cleaning/Divine Fireplaces: ‘Best of Judgment’ assessment 01/07/00 to 31/03/03”, and setting out calculations made by Mr Nex of the estimated sales and income and also of the estimated expenditure of the two businesses for the period 1 July 2000 to 31 March 2003, with further calculations of output VAT and input VAT based on these estimates, with a final calculation of net VAT due for this period.  We refer to this spreadsheet as “the Best Judgment Calculation”.
12.	Neither Mr Nex’s witness statement nor the documents in support by way of evidence had been served by the Commissioners’ solicitors on the Appellant either directly or by service at the tribunal centre.  We considered whether the Appellant had been prejudiced by this failure on the part of the Commissioners particularly in the circumstances where the Appellant was not present at the hearing to challenge Mr Nex’s evidence.  We concluded that Mr Nex’s witness statement and the documents in support related in substance to matters of which the Appellant has knowledge (namely, his business affairs and records and also the dealings between the Appellant and the Commissioners) so that the Appellant was not prejudiced by his failure to have notice of them in advance of the hearing.  We also took into account the Appellant’s right, referred to in para. 8 above, to apply to have this decision set aside.
13.	From the evidence before us we find the facts as set out in paras. 14 to 29 below.  In the absence of the Appellant Mr Nex’s evidence produced at the hearing was unchallenged on the part of the Appellant, but we saw no reason to question the reliability of Mr Nex’s evidence.
14.	The Appellant is a sole trader who in May 1998 set up a business of contract cleaning trading under the name “J M Cleaning”.  The sole contract of this business was with an old people’s home known as Bradbury House, where the Appellant’s wife had previously worked as a cleaner for another contract cleaning business. The bank accounts for the business were in the name of the Appellant alone (designated “J Boggeln, T/A J M Cleaning” and with the Appellant as the sole signatory), and the Appellant secured a bank loan in his name to provide working capital for the business.  The Appellant’s wife was a full-time employee of the Appellant (the Appellant operated the PAYE system in relation to her earnings from the business) and 4 or 5 part-time cleaners were also engaged as employees.
15.	Since November 1998 the Appellant has also as a sole trader carried on the retail trade of supplying and fitting fireplaces, fire surrounds, tiles and accessories, trading under the name “Divine Fireplaces”.  Again, the bank accounts for the business were in the Appellant’s name alone (designated “J Boggeln, T/A Divine Fireplaces” and with the Appellant as the sole signatory) and he took a bank loan to capitalise the business (although he also drew on the profits of the J M Cleaning business to fund the fireplace business at the outset).  The Appellant took a lease of retail premises (a small showroom and back office) for the business in Lane End in Buckinghamshire.  There were no employees of the fireplace business.  The business was to an extent “seasonal” – during peak periods the Appellant worked full time in the business (leaving his wife to manage the J M Cleaning business), and during slack periods he divided his time between the fireplace business and the J M Cleaning business.
16.	No business records for either business exist for the period prior to May 2002 – the Appellant stated to the Commissioners that such records had been stored in a shed at this home address, but were destroyed by rain penetrating a leaking roof.  Bank statements for the separate accounts operated for the two businesses are available as from May 2002.
17.	The Appellant made self-assessment returns to the Inland Revenue for income tax purposes in relation to the two businesses, the first such return relating to an accounting period of 4 May 1998 to 3 May 1999 for the J M Cleaning business, and for the accounting period 28 May 1998 to 27 May 1999 in relation to the fireplace business.  Separate returns were made for the two businesses, but under the same Inland Revenue reference number.  The income tax returns included a statement of sales income for each business and business expenditure for each business itemised in defined categories.  The income tax returns for the periods up to April 2000 were prepared by an accountant engaged by the Appellant, but after a dispute between the Appellant and the accountant at the end of 2000 the Appellant has prepared subsequent tax returns himself, assisted by his wife who helped out with the book-keeping for both businesses.  The Inland Revenue supplied details of the Appellant’s tax returns relating to the two businesses to the Commissioners.
18.	The Commissioners began investigating the affairs of the Appellant following a referral from the Department of Works and Pensions who had been carrying out for their purposes an investigation of the Appellant’s affairs.  On 12 February 2003 Mr Nex visited the Appellant at the premises of the Divine Fireplaces business.  The Appellant allowed Mr Nex to examine the statements of the bank accounts of the two businesses.  No further information or records were available for the J M Cleaning business.  For the Divine Fireplaces business the Appellant showed Mr Nex a series of invoices, the earliest dated January 2001.  Many were undated and none had serial numbers.  In some cases the typed invoice price was over-written in manuscript with a lower price.  Mr Nex considered them to be of doubtful audit value.
19.	By his letter to the Appellant dated 17 February 2003 Mr Nex explained that as a result of the information included in the Appellant’s tax returns, and such further background information which the Appellant had provided at the visit, it appeared that the Appellant had been carrying on two businesses as sole trader, both of which businesses made standard-rated supplies for VAT purposes, and that the combined turnover of the two businesses was likely to have exceeded the relevant VAT registration threshold in either 1999 or 2000.  Mr Nex enclosed with his letter the relevant VAT Notice setting out the requirements as to registration and he requested the Appellant to calculate the date on which, by reason of his supplies exceeding the registration threshold, effective registration was required, and then to complete accordingly form VAT 1 (Application for registration).  Mr Nex requested the Appellant to reconstruct his business records so far as he was able in order to calculate the effective date of registration and the amount of VAT due for the periods since that date, and warned him that if he failed to do so the Commissioners would proceed to register the Appellant compulsorily from the information in their possession.
20.	In his letter of 17 February 2003 Mr Nex set out the annual turnover of the two businesses for the period from inception to 5 April 2002 as specified in the self-assessment income tax returns submitted by the Appellant, and also a schedule allocating that turnover for each business to each month (dividing the annual amount on an even basis) for the period from May 1998 to April 2000.  This schedule showed the cumulative turnover, at the end of each month, for the 12 month period then ended, from which it appeared that at the end of November 1999 the cumulative turnover for the 12 month period then ended amounted to £52,321.57, thus exceeding the then applicable VAT registration threshold of £51,000, indicating a required registration date of 1 January 2000.
21.	The Appellant completed a form VAT 1 (Application for registration) dated 27 February 2003, describing himself as the sole proprietor of the business carried on under the trading name “Divine Fireplaces” and referring to the J M Cleaning business as a business he also carried on as sole trader.  He left blank the answer to the questions “Have you made any taxable supplies yet?”, and “Have your taxable supplies, in the past 12 months or less, gone over the registration limit?”, and specified 1 March 2003 as the date he would like to be registered.
22.	Nothing further was heard from the Appellant until the Appellant’s June 03 Letter, and in particular there was no response to Mr Nex’s letter of 17 February 2003 by way of challenge to the proposed turnover amounts or by way of the supply of any further records or information as to the supplies made in the course of carrying on the two businesses.
23.	Mr Nex reviewed the information in the Appellant’s income tax returns and noted that there was some inconsistency in the dates and periods of accounts shown in the returns.  To avoid any uncertainty he therefore decided to take as his reference point the aggregate of the turnover of the two businesses, as returned by the Appellant for income tax purposes, for the year to the end of May 2000 (both businesses used a May year end as the basis period for returning income for self-assessment purposes).  This aggregate figure was £78,280, well in excess of the then VAT registration threshold of £52,000, and on this basis Mr Nex determined that the Appellant should be compulsorily registered with effect from 1 July 2000.  Mr Nex considered this to be a determination in the Appellant’s favour, since it was likely that the Appellant’s supplies (aggregated for the two businesses, as per the income tax returns) exceeded the registration threshold by the end of 1999, as stated in the letter of 17 February 2003.
24.	In the Appellant’s June 03 Letter the Appellant explained why he had not registered for VAT purposes.  He gave the following as his reasons:-
(1)	There had been no written contract between J M Cleaning and its customer, and because the number of cleaners supplied by the business to the customer varied from week to week between 3 and 4 (and one more for a period when they provided laundry services), it was difficult to predict the annual turnover of the business;
(2)	The turnover of the Divine Fireplaces business in itself had never exceeded the VAT threshold, and because of the unpredictable nature of the turnover of the J M Cleaning business he was not aware the threshold had been exceeded;
(3)	He had been let to believe by his accountant that the two businesses were to be treated independently for VAT purposes;
(4)	In the early stages of the Divine Fireplaces business funds were transferred from the J M Cleaning bank account to the Divine Fireplaces bank account and this resulted in an over-statement of the receipts of the Divine Fireplaces records resulting in the same funds being taxed twice.
25.	On 1 July 2003 the Appellant submitted his first VAT return, showing the amount of VAT due as nil.  The Commissioners treated this return as relating to the period beginning with the date of compulsory registration (1 July 2000) and ending 30 June 2003.
26.	The Commissioners treated the Appellant’s June 03 Letter as a request for a reconsideration of Mr Nex’s decision to register compulsorily the business with effect from 1 July 2003.  The matter was reviewed by an officer in their Appeals and Reconsiderations department, who wrote to the Appellant on 18 August 2003 setting out her understanding of the situation and replying to the specific points raised by the Appellant.  The officer upheld Mr Nex’s determination and confirmed that the effective date of registration of the Appellant was 1 July 2000 and that VAT was payable on supplies made in both businesses as from that date.
27.	On 27 August 2003 the Commissioners issued the Notice of Assessment now under appeal.  This was made pursuant to their powers under section 73(1) VATA, entitling them to assess amounts of tax due to the best of their judgment where returns are incomplete or incorrect or documents are not available to enable returns to be verified.  The amount of tax assessed is £29,970 for the period from 1 July 2000 to 30 June 2003 and there is interest of £101.40 included in the assessment.  Mr Nex calculated the tax assessed in the spreadsheet we refer to as the Best Judgment Calculation.  It is necessary to explain that calculation in some detail:-
(1)	First, Mr Nex calculated a sum for the turnover of the two businesses in aggregate for the whole of the period 1 July 2000 to 31 March 2003.  He calculated a figure for each year;  
(2)	For the periods where there were self-assessment income tax returns made by the Appellant (up until 5 April 2002) he used the sums shown as income in these returns, pro rating the figures for the year 6 April 2000 to 5 April 2001 to arrive at the figure for 1 July 2000 to 5 April 2001;
(3)	For the period 1 May 2002 to 31 January 2003 he took as turnover of each business the amounts shown as receipts in the bank statements of the bank accounts for each business (as provided to him by the Appellant at the February 2003 visit).  He extrapolated from these figures estimated receipts for the two months February and March 2003;
(4)	In aggregate this gave a calculation of turnover of £328,849.02 for the period 1 July 2000 to 31 March 2003.  This amount was treated as being inclusive of VAT and therefore resulted in an amount of output tax of £48,977.51;
(5)	Secondly, Nr Nex calculated a sum for such expenditure for each of the businesses as would be taxable input supplies of the businesses for VAT purposes;
(6)	To make this calculation he referred to the self-assessment income tax returns to identify, in relation to each business, the categories of expenditure identified in those returns which were likely to comprise taxable input supplies (cost of sales, general administrative expenses, motor expenses, advertising), and the amount, for each year, within each such category;
(7)	For the periods following 5 April 2002 (when no income tax returns were available) he extrapolated expenditure amounts using the same proportions to turnover as applied in the periods for which income tax returns were available;
(8)	In aggregate this gave a calculation of expenditure of £144,394.19, which, treated as VAT-inclusive, resulted in an amount of input tax of £21,505.52;
(9)	Treating all this input tax of £21,505.52 as recoverable against the calculated output tax of £48,977.51, the resulting net tax was calculated as £27,472.  This figure related to the period 1 July 2000 to 31 March 2003, and Mr Nex therefore increased this figure rateably to give the amount shown in the Notice of Assessment for the period 1 July 2000 to 30 June 2003 of £29,970.
28.	On 4 September 2003 the Appellant was notified that he had been assessed to a misdeclaration penalty pursuant to section 63 VATA in the sum of £4,495.
29.	On 9 September 2003 the Appellant gave Notice of Appeal against both the assessment and the misdeclaration penalty, giving the following as his grounds of appeal:
“We were informed that my two businesses could not be linked for VAT purposes – we have never charged the VAT so we have never received this vast sum of money.  We haven’t made that sum of money in profit.  We cannot therefore afford this amount and to continue this would force me into liquidation which would not help anybody.  Since April of this year I have charged VAT and have received payment.”
The relevant legislation
30.	For the purposes of this appeal it is necessary to refer to the provisions in the VAT legislation relating to registration, assessments made by the Commissioners to best judgment, and misdeclaration penalties.
31.	As to registration, section 3(1) VATA provides that a person is a taxable person for VAT purposes while he is or is required to be registered under the VATA.  By section 4(1) VATA a taxable person who makes taxable supplies of goods or services in the course of any business carried on by him is required to charge VAT on such supplies where they are made in the UK.  We can note at this point that at no time has the Appellant asserted that the supplies of goods (in the case of the Divine Fireplaces business) or the supplies of services (in the case of the J M Cleaning business) are of a nature which would require them to be treated as exempt or zero-rated supplies for VAT purposes – in other words, his quarrel with the Commissioners is as to whether his turnover was such that he should have registered for VAT, not as to whether in principle the supplies he made were taxable in nature.
32.	The requirement to register is set out in paragraph 1(1) of Schedule 1 to VATA, which provides (so far as relevant to this appeal) that a person who makes taxable supplies but is not registered becomes liable to be registered at the end of any month, if the value of his taxable supplies in the period of one year then ending has exceeded the specified amount (£52,000 for the year to the end of March 2001).  The Commissioners are required to register a person who is liable to be registered even if he fails to notify them that he is so liable, and registration is with effect from the end of the month following that in which the threshold is exceeded: paragraph 5(2) of Schedule 1 to VATA.
33.	As to assessments made to best judgment, the power to make such assessments is given to the Commissioners by section 73(1) VATA, which is in the following terms
(1)	Where a person has failed to make any returns required under this Act…or to keep any documents and afford the facilities necessary to verify such returns or where it appears to the Commissioners that such returns are incomplete or incorrect, they may assess the amount of VAT due from him to the best of their judgment and notify it to him.”
34.	Finally, as to misdeclaration penalties, section 63(1) VATA provides that where, for a VAT accounting period, a return is made which understates a person’s liability to VAT, the person who has made that return is liable to a penalty equal to 15 per cent of the VAT underdeclared.  The penalty arises only where the amount of underdeclared tax exceeds 30 per cent of the gross amount of tax which should have been stated in the return had there been no underdeclaration.
35.	However, if the person making the underdeclaration satisfies the Commissioners (or, on appeal, the tribunal) that there was reasonable excuse for such conduct, then no penalty is due: section 63(10) VATA.  For these purposes certain specified matters or conduct may not be regarded as constituting “reasonable excuse”, namely, (i) an insufficiency of funds to pay any VAT due, and, (ii) “where reliance is placed on any other person to perform any task, neither the fact of that reliance nor any dilatoriness or inaccuracy on the part of the person relied upon”: section 71(1) VATA.
36.	There is also a discretionary right for the Commissioners, or, on appeal, the tribunal, to mitigate a misdeclaration penalty (including reducing it to nil) in certain situations.  However, in exercising that discretionary right the Commissioners (or the tribunal) may not take into account certain matters, including (i) the insufficiency of funds available for paying any VAT due or any penalty amount, and, (ii) the fact that the person liable to the penalty (or a person acting on his behalf) has acted in good faith: section 70 VATA.
The case for the Appellant and the case for the Commissioners
37.	The Appellant, as we have mentioned, was not present in person or by a representative to put his case at the hearing of his appeal.  We therefore look to the documents we have in which he sets out his arguments, namely, the Appellant’s June 03 Letter (whose terms are summarised at para. 24 above) and the Notice of Appeal (set out in full at para. 29 above).
38.	It would appear that the Appellant’s case is that, taking each of the two distinct businesses separately, in neither case did the turnover exceed the VAT threshold, and so he did not consider that he was liable to register for VAT and then to charge VAT on the supplies he made in carrying on the businesses.  He appears to have taken advice on the point from an accountant adviser to the effect that the businesses should be treated independently for VAT purposes, and he acted on that advice.  We will assume (although it is not clear) that the Appellant is arguing that he is right in law to treat the two businesses separately, so that he is not liable to register for VAT since in neither case has the turnover (that is, the amount of taxable supplies) in any one year period exceeded the relevant threshold.  We assume also that, as an alternative point, the Appellant is arguing that he acted in good faith in relying on professional advice.
39.	As to the amount of the assessment made on the Appellant by the Commissioners, the Appellant makes three points: (i) that the statement of the income of the Divine Fireplaces business in certain of his income tax returns (used by the Commissioners as the basis for determining when he became liable to register and also to calculate the VAT underdeclared) was incorrect – that is, overstated -  in that funds transferred from the J M Cleaning business were wrongly shown as income receipts of the business; (ii) that he had not charged any customers VAT on any supplies made by either business, so that the VAT assessed on him would have to be paid out of the profits of the businesses, and the VAT assessed exceeded the amounts of those profits; and (iii) that the businesses had insufficient funds to pay the VAT assessed, so that enforcement of the assessment would result in liquidation of the businesses.
40.	The case for the Commissioners was put to us by Miss Neenan in the following terms:  
(1)	the Appellant became liable to be registered for VAT purposes with effect from 1 July 2000, by which time the aggregate of the taxable supplies made in the course of the two businesses he carried on exceeded the relevant threshold specified in paragraph 1(1) of Schedule 1 to VATA;
(2)	the Commissioners had been compelled to make an assessment to the best of their judgment under section 73(1) VATA since the Appellant had made a “nil” return, and since the Appellant had failed to make available to them any business records, the Commissioners had used, and had used fairly, the only information which was available to them in order to calculate the amount of VAT due, namely the Appellant’s self-assessment income tax returns and the amounts shown as deposit receipts in the relevant bank accounts.  The assessment had therefore been made to best judgment;
(3)	the misdeclaration penalty had been correctly issued since the Appellant had failed to declare his liability to VAT, and there was nothing in the circumstances or in the Appellant’s conduct which, within the scope of the legislation, amounted to reasonable excuse or justified the tribunal in mitigating the penalty.
41.	As to her first point, Miss Neenan referred us to Customs and Excise Commissioners v Glassborow [1975] 1 QB 465 as authority for the proposition that it is the person, and not the business, which is required to register, and that all the person’s different business activities must be covered by the one registration.  It follows that in determining whether the registration threshold has been exceeded, the supplies made in all businesses carried on by the taxpayer must be taken together.
42.	As to whether the assessment made on the Appellant had been to best judgment, Miss Neenan referred us to the Court of Appeal judgment in Rahman (No 2) v Customs and Excise Commissioners [2003] STC 150 which requires the tribunal to concentrate on the amount of tax fairly due having regard to the information available to the Commissioners in making the assessment and any other information made available to the tribunal by the Appellant.  In the present case the amount of tax shown as due in the assessment had been calculated fairly by the Commissioners by reference to the information available – the Appellant had been encouraged by the Commissioners to produce his business records, but he had not done so.  In making the assessment the Commissioners had exercised best judgment, and there was no basis for challenging the amount of the assessment.
43.	As to the misdeclaration penalty, Miss Neenan referred us to Customs and Excise Commissioners v Salevon Ltd  and Customs and Excise Commissioners v Harris [1989] STC 907 as authority for the proposition that reliance on professional advice which proves to be incorrect does not amount to a reasonable excuse, having regard to the restricted meaning which the legislation gives to that concept.
The decision on the issue of whether the Appellant was liable to register for VAT
44.	The first issue for our decision is whether the Appellant was required to register for VAT purposes with effect from 1 July 2000.  We accept the case put forward by the Commissioners, and it is our decision that the Appellant was so required to register.  The Commissioners were therefore entitled to register him compulsorily with effect from that date, and from that date he became liable to charge and account for VAT on taxable supplies made in the course of both the businesses he carried on.
45.	As we note at para. 31 above, the Appellant is not arguing that the supplies in both businesses are not in principle taxable supplies – his case is that he carried on two distinct businesses, entirely different in their nature and characteristics, and the aggregate annual supplies in each business fell short of the VAT registration threshold.  The businesses were not commercially linked, and he considered (and perhaps was so advised) that they were not linked for VAT purposes.
46.	This, however, is an issue which was resolved early in the life of VAT, in the Glassborow case, to which Miss Neenan referred us.  That case is concerned with the question of whether two persons (acting in partnership) who carried on two separate businesses were required to be registered once (with the single registration covering both businesses) or to be registered twice (once in respect of each business).  In his judgment Mr Justice May said as follows [at p. 473C]:-
“…I think that it becomes apparent that the scheme of the Act is to register “persons” as accountable for VAT, not the business or businesses which they may carry on.  Further, the necessary corollary of this conclusion and approach to the Act is that any one “person” is entitled to only one registration under the Act, save as particular sections of it otherwise specifically provide.
Hence, even if one man runs a number of separate and distinct businesses, he remains one person and is entitled to only one registration.”
47.	It follows from this that when the question arises as to whether a person who makes taxable supplies is liable to be registered, as required by paragraph 1(1) of Schedule 1 to VATA, it is the value of all the taxable supplies which he makes – even if they are supplies made in different businesses he may be carrying on – which must be taken into account in ascertaining whether or not, at the material date, the value of those supplies has exceeded the VAT threshold amount.
48.	Applying this to the Appellant’s circumstances, his liability to register for VAT must be ascertained by the value of the aggregate of the supplies he made in the course of carrying on both the businesses of which he was the sole proprietor, and this is so even though there is no other commercial or business link between those two businesses.  Therefore, as soon as he reached the end of a month where, looking back over the period of one year then ended, the total supplies during that year taking both businesses together had a value exceeding the VAT threshold (£52,000 if that month end fell between 1 April 2000 and 31 March 2001), he became liable to register, and thereafter liable to charge and account for VAT on supplies he made in carrying on those businesses.  He failed to notify the Commissioners that he had become liable to register, and the Commissioners were therefore required to register him compulsorily with effect from the end of the following month, as specified in paragraph 5 of Schedule 1 to VATA.
49.	If the Divine Fireplaces business and the J M Cleaning business had been carried on by different persons, then it would follow from the Glassborow case that there would be a separate registration for each of those persons, in which case, in looking to see whether each of those persons was making taxable supplies of a value exceeding the registration threshold it would be necessary to look separately at the business each person carried on.  This would be the case, for example, if the Appellant had carried on the Divine Fireplaces business as sole trader, but had carried on the J M Cleaning business in partnership with his wife (such a partnership would be treated as a separate “person” for these purposes from the Appellant as sole trader).  
50.	We considered whether there was any evidence to suggest that the J M Cleaning business was carried on by the Appellant and Mrs Boggeln in partnership.  It appears that Mrs Boggeln may have had some part in securing J M Cleaning’s contract to clean the old people’s home (she had been employed by the previous cleaning contractor), and at those times when the Divine Fireplaces business required the full attention of the Appellant it appears that Mrs Boggeln managed the performance of the cleaning contract.  However, the bank account for the J M Cleaning business was in the name of the Appellant alone, and he alone was the sole signatory, and was the borrower from the bank of the loan which capitalised the business.  Furthermore, for income tax and PAYE purposes Mrs Boggeln was treated as an employee of the Appellant.  Finally, the Appellant at all times in the VAT investigation (and in completing the form VAT 1 (Application for registration) represented himself to be the sole proprietor of the J M Cleaning business.  We therefore conclude that on the evidence before us, the Appellant and Mrs Boggeln were not joint proprietors in partnership of the J M Cleaning business – as with the Divine Fireplaces business, the Appellant was the sole proprietor.
51.	The final matter in relation to the compulsory registration of the Appellant is whether the Commissioners were entitled to choose the date of 1 July 2000 as the effective date of registration.  We have explained how Mr Nex decided upon this date (see para.23 above).  In the absence of any records of the two businesses, Mr Nex used the only information available to him, namely the self-assessment income tax returns made by the Appellant in relation to the two businesses.  Where there was a question of doubt he resolved that in the Appellant’s favour.  His initial calculation, enclosed with his letter of 17 February 2003 to the Appellant, indicated that the registration threshold was exceeded in November 1999 (implying a registration date of 1 January 2000), but in the Appellant’s favour he used the income tax figures submitted for the accounting periods of the businesses for the year to the end of May 2000, from which it appeared that, by the end of May 2000, the amount of the total supplies (both businesses taken together) for the year then ended was in excess of £78,000, and therefore well above the then VAT registration threshold of £52,000.  This approach seems to us to be both reasonable and fair to the Appellant in the circumstances under which Mr Nex had to reach his conclusion.  
52.	It is therefore our decision that the Appellant became liable to register for VAT with effect from 1 July 2000 and that, having failed to do so, the Commissioners were entitled to register him compulsorily with effect from that date.
53.	The Appellant argues that he was not aware that he was required to take his two businesses together in calculating whether he had reached the registration threshold, and that, furthermore, he was advised that the two businesses could not be “linked” for VAT purposes.  He also makes the point that the variable nature and amount of the supplies made under the cleaning contract by the J M Cleaning business made it difficult to calculate when the threshold was reached.  None of these points excuses in law the Appellant from the liability which the VAT legislation imposes on him to register for VAT.  Neither his own lack of understanding of his responsibilities in law, nor any reliance he may have placed on any incorrect advice he received, will enable him to escape the liability to register and the Commissioners’ right to register him compulsorily if he fails to do so.  As to his point about the variable nature of the supplies under the cleaning contract, that is not relevant since the threshold for registration is calculated by looking back over the previous year, so that it is the total of the supplies made over that period which is relevant, however much they may have varied from month to month – forecasts of what may happen in the future are not relevant.
The decision on the issue of whether the assessment was made to best judgment
54.	The next issue for our decision is whether the assessment to VAT made by the Commissioners on the Appellant by the Notice of Assessment dated 27 August 2003 for £29,970 plus interest was made by the Commissioners to the best of their judgment, as required by section 73(1) VATA.  Even if the assessment is made to best judgment, the tribunal has power to reduce the amount of VAT assessed if there is evidence that the calculation made by the Commissioners has not taken account of any relevant matters.  We regard the Appellant’s appeal as relating to both matters.
55.	The burden of proof lies on the Appellant in seeking to challenge the assessment and the amount of VAT assessed – it is for him to show that the assessment was not made to best judgment and, if it was made to best judgment, and he wishes to argue that the amount of VAT assessed is excessive, it is for him to produce the evidence which shows that a reduced amount is the proper amount to be assessed.
56.	The Commissioners have the power under section 73(1) VATA to make an assessment to the best of their judgment in any of three circumstances: (i) “where a person has failed to make any returns required under” VATA; (ii) “where a person has failed …to keep any documents and afford the facilities necessary to verify such returns”; or (iii) “where it appears to the Commissioners that such returns are incomplete or incorrect”.  All three of those circumstances exist in relation to the Appellant, who failed to make VAT returns as from the date he became liable to register; who failed to keep records of his businesses; and when he did eventually make a VAT return, made a nil return when he was making taxable supplies.  The Commissioners were therefore entitled to use their powers under section 73(1) VATA.
57.	The approach we must adopt in relation to assessments made to best judgment is now well charted by the Court of Appeal in the recent cases of Rahman (No 2) v Customs and Excise Commissioners to which Miss Neenan referred us, and Pegasus Birds v Customs and Excise Commissioners  [2004] EWCA Civ 1015.  The primary focus is to establish that the amount of the assessment is fair, in the light of all the evidence, and to reduce the assessment if the evidence so requires.  Only where the assessment is reduced by a substantial amount should there be an enquiry as to whether the assessment was so capricious or arbitrary or was so wholly unreasonable that no officer seeking to exercise best judgment could have made it.
58.	In the present case, where no business records of any kind were available for the period prior to May 2002, and where the only reliable records for subsequent periods supplied by the Appellant were statements of the bank accounts for the two businesses, the Commissioners clearly had some difficulties in estimating the likely net tax (output tax on supplies made less input tax on supplies received).  The approach made by Mr Nex, the officer concerned, and the detail of his calculations in the Best Judgment Calculation is described in para. 27 above.  For the initial periods where the Appellant had made income tax returns in relation to the businesses, Mr Nex used the information from those returns to calculate both the amount of supplies made by the businesses (and hence the output tax which should have been charged) and the amount of supplies received by the businesses (and hence the input tax which should have been credited against the output tax).  For the later periods, for which no income tax returns were available, Mr Nex took the bank statements and treated the amounts received into the accounts as receipts of the businesses and hence the amount of supplies made.  For those later periods he calculated input tax on supplies received by an extrapolation of the amounts apparent from the tax returns for the earlier periods.
59.	That approach, in the absence of all other business records, seems to us to be fair.  To the extent that it utilises information appearing in the Appellant’s income tax returns it is clearly based on information supplied by the Appellant in circumstances where he has a duty to supply accurate information.  Furthermore, for at least part of the period the Appellant was using the services of an accountant adviser, which the Commissioners are entitled to assume gives some veracity to the information included in the income tax returns.  To the extent that it utilises information appearing in bank statements, that information (at least as to the amounts banked) can also be relied on, and whilst not all amounts appearing as receipts in the bank statements would necessarily be receipts of the business, it would also be the case that any cash receipts of the business would not appear in the bank statements if the cash were used to pay expenses rather than being banked.
60.	We had some concern that by taking items deposited in the bank accounts as receipts there could be some overstatement of taxable supplies as compared with the position appearing from the income tax returns.  However, in the last year for which there is an income tax return (the year to 5 April 2002) the total turnover (and thus the amount taken as taxable supplies) of the two businesses as appearing in the income tax return is £124,578; for the following year (pro rated) the total turnover (and again therefore the amount taken as taxable supplies) of the two businesses as taken from the bank statements is £130,843, which represents a credible increase (approximately 5%) in turnover.
61.	We had no evidence from the Appellant by way of challenge to these calculations.  The Appellant asserted in the Appellant’s June 03 Letter and in his Notice of Appeal two relevant points on the issue of the quantum of the assessment: (i) that the information in his income tax returns could not be relied on, as in the start-up period he had moved funds from the J M Cleaning business to the Divine Fireplaces business, and these funds had (incorrectly) appeared in his income tax returns as sales receipts of that business; and (ii) that the amount assessed exceeded the profits of the businesses.  These assertions in themselves, without substantiation or detailed explanation, provide us with no basis to recalculate any part of the assessment.
62.	It is the case, as we see it, that the Appellant was unable, or unwilling, to supply to the Commissioners any records relating to his businesses, and the Commissioners used such information as was available to them to estimate the likely tax due, calculating on the basis of that information, and using a reasonable method, an estimate of the taxable supplies made and the resulting output tax, and making due allowance for likely input tax on supplies received by the business.  The Commissioners urged the Appellant to provide such information as he had and to attempt to reconstruct his business records so as to enable a more accurate assessment to be made, but the Appellant took no steps to do so. 
63.	As we have mentioned, the burden of proof in relation to these matters lies on the Appellant, and the Appellant has not provided any evidence to challenge the amount of the assessment.
64.	It is our decision that, in all these circumstances, the amount of the assessment was calculated fairly and reasonably and there are no grounds to reduce the amount of the assessment, which therefore stands.  It follows that the assessment was made by the Commissioners to the best of their judgment.
The decision on the issue as to whether the Appellant is liable to a misdeclaration penalty
65.	It is clear to us that in principle the Appellant is liable to a misdeclaration penalty, since his circumstances fall within the scope of section 63(1) VATA: on 1 July 2003 he made a VAT return for the period up to 30 June 2003 showing the amount of VAT due as nil.  This return should have covered the period from 1 July 2000, the date with effect from which he should have been registered.  Even if it covered the period from 1 March 2003 (the date specified by the Appellant as the date from which he would like to be registered in the form VAT 1 he submitted) there would still have been taxable supplies made by the Appellant which should have been shown in the return.  Thus the Appellant made a return which understated his liability to VAT, and the amount by which he understated his liability was more than 30 per cent of the gross amount of tax for the purposes of section 63 VATA.
66.	There is then the question of whether the Appellant has a reasonable excuse for his conduct in making the incorrect return.  For these purposes section 71(1) VATA specifies that an insufficiency of funds to pay the VAT due cannot count as a reasonable excuse.  That section also specifies that if a taxpayer has relied on someone else, it cannot count as a reasonable excuse that he relied on that person, nor that the person he relied on acted in a way which was dilatory or inaccurate.
67.	One of the grounds of the Appellant’s appeal appearing from his Notice of Appeal is that he does not have the funds to pay the VAT.  That is not, within the terms of the VAT legislation, a reasonable excuse for making a return which substantially understates the actual VAT liability.
68.	The Appellant also makes the point that he was advised that the two businesses were to be treated as independent for VAT purposes.  It seems to us that this is a point which is relevant to the failure to register, but is not relevant to the making of the “nil” return on 1 July 2003, by which time, following the visit of Mr Nex in February 2003 and his subsequent letter of 17 February 2003, the Appellant had been made fully aware of his responsibilities.
69.	Even if we assume in the Appellant’s favour that he received incorrect advice from his accountant adviser in relation to the making of the return, that still does not constitute a reasonable excuse for his conduct within the terms of the VAT legislation.  This point is settled by the cases of Customs and Excise Commissioners v Salevon Ltd  and Customs and Excise Commissioners v Harris heard together and reported at [1989] STC 907.  In the Harris case the taxpayer took advice from an accountant as to whether he should register for VAT, and was advised that he was not yet liable to register on the mistaken grounds that the taxpayer’s business had not made taxable supplies exceeding the registration threshold.  It was held that the taxpayer could not argue that he had a reasonable excuse for his conduct in failing to register and make the required returns – he had relied on someone to perform the task of advising him as to his VAT liabilities, and that person had been inaccurate in performing that task.  So whereas reliance on third party advice might well appear in ordinary terms to be a reasonable excuse for the conduct of the taxpayer, that is not the case for VAT purposes because of the express limitation imposed by what is now section 71(1) VATA on what constitutes a reasonable excuse in such cases.
70.	It is our decision therefore that the Appellant has no reasonable excuse for his conduct in making a return in which he underdeclared his liability to VAT.
71.	It is also our decision that we should not reduce the amount of the misdeclaration penalty by way of mitigation.  Whatever the advice received by the Appellant before he was visited by Mr Nex in February 2003, the Appellant was fully aware of his position following that visit and the letter he received as a consequence of that visit.  Had he then co-operated with the Commissioners, or attempted to make proper returns, there might have been grounds for mitigating the penalty.  But this was not the case, since he applied for registration as from 1 March 2003, notwithstanding that he had been advised by the Commissioners that he had exceeded the registration threshold about three years previously, and he later made a “nil” return when clearly on any basis he was liable for VAT.  We see no grounds for mitigation of the penalty in view of this behaviour.
72.	We therefore dismiss the appeal.
73.	We would add two points in conclusion:  first, if the Appellant did in fact rely on advice from an accountant adviser that he could treat the two businesses separately in determining whether his taxable supplies had exceeded the registration threshold, then it is for him to consider whether or not he has any remedy against that adviser for any adverse consequences he suffered as a result of relying on that advice.  That is not, however, a matter for this tribunal.  Secondly, it seems that the Appellant acted with some enterprise and energy in setting up the two businesses, and there is indication from the papers we saw that he did so against a background of some financial difficulty or disadvantage.  That is to his credit.  It is unfortunate, however, that, whether through poor advice or failure on his own part, he failed to comply with the clear VAT obligations imposed on him by law, and he compounded that failure by his unwillingness to work with the Commissioners to arrive at an agreed determination of his likely VAT liability.  Although we may have some sympathy for his circumstances, there is no doubt that his appeal has no basis in law.
74.	The Commissioners did not apply for their costs, and therefore we make no order as to costs.

EDWARD SADLER

CHAIRMAN

RELEASE DATE: 9 March 2005

LON/2003/0886