19749

LATE REGISTRATION PENALTY – reasonable excuse – advice taken by non-registered charity on whether point A made them registrable resulting in obtaining further advice that identified point B leading to an earlier registration date while concluding that point A on its own would not have made the Appellant registrable – whether Appellant has reasonable excuse – yes – whether loses that defence because of taking further advice rather than informing Customs about point A – no – appeal allowed

LONDON TRIBUNAL CENTRE

	THE TRUSTEES OF LANGLEY HOUSE TRUST	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

			Tribunal:	DR JOHN F AVERY JONES CBE (Chairman)
					CYRIL SHAW FCA

Sitting in public in London on 9 August 2006

Steve Hodgetts, VAT partner, Baker Tilly, for the Appellant

Jonathan Holl, senior officer of HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2006

DECISION

1.	This is an appeal by the Trustees of Langley House Trust against a late registration penalty of £19,812.90 (after 50 per cent mitigation) imposed on 11 January 2006.  The Appellant was represented by Mr Steve Hodgetts, and Customs by Mr Jonathan Holl.
2.	We had bundles of documents from both parties but heard no oral evidence.  We find the following facts:
(1)	The Appellant is a Christian charity providing housing for ex-offenders.  The Appellant is a substantial charity with a turnover of over £6m in its accounts to 31 March 2004.  In the past their activities have been wholly outside the scope of VAT.  
(2)	In the year to 31 March 2004 the Appellant’s accounts show for the first time the receipt of £54,244 consultancy fees, and the 2005 accounts show an equivalent figure of £120,032.  These represent fees for the supply of staff to an associated charity, TCHT.
(3)	The Appellant sought advice on its VAT position from its auditors, Mazars, in September 2004, we infer on account of the consultancy fees shown in the accounts to 31 March 2004 which presumably had recently been completed (we do not know the date as we do not have the 2004 accounts but are working from the comparative figures in the 2005 accounts).  Apparently, although we did not see their advice, Mazars advised in October 2004 that these represented taxable supplies and the Appellant was registrable from 1 July 2004.  Nothing was done about this advice and we do not know the reason.
(4)	In January 2005 Baker Tilly, who have particular expertise in the charitable sector, were asked to advise but were not told about Mazars’ advice.  Baker Tilly reviewed the Appellant’s entire income and drew their attention at a meeting in February 2005 to a potential VAT problem with an “enhanced supervision” contract with the Home Office.  Discussions between Baker Tilly and the Home Office took place and it was eventually decided that such income was taxable and that the effective date for registration was 1 June 2002.  An application for registration was made on 31 August 2005, and the Appellant was duly registered from this date.  
(5)	Baker Tilly considered that the point identified by Mazars would not have made the Appellant registrable in the absence of the enhanced supervision contract issue.  The figures from which the registration date was calculated show as outputs for 2003-04, TCHT management charges of £14,743.28, TCHT consultancy of £14,191, payroll of £5,516.88 and fundraiser of £5,030.39.  For 2004-05 the equivalent figures are respectively £8,430.48, nil, £823.94, and nil.  These, which represent the problem identified by Mazars, would not have made the Appellant registrable.  We understand that this is because Baker Tilly took a different view of who was the employer of the staff.
(6)	On 11 January 2006 Customs issued the Appellant a late registration penalty at the rate of 15 per cent amounting to £39,625.80 but mitigated by 50 per cent to £19,812.90 for declaring and calculating the liability.  As a result of further correspondence Customs mitigated the penalty by “a further 25%” to £14,859 on account of the Appellant having taken advice and this being a complex area, but declined to remove the penalty as it sought advice only in September 2004 when the threshold was exceeded in June 2002.  In doing this they reduced the amount already mitigated by 50 per cent by 25 per cent, thus making a total mitigation of 62.5 per cent.  Mr Holl accepted that they intended to mitigate the full amount by 25 per cent and that it should be reduced to £9,906.
3.	Mr Hodgetts, for the Appellant contends that it had a reasonable excuse for the late registration.  It was Baker Tilly who had spotted the point on the “enhanced supervision” contract which had not occurred to anyone before and was a difficult area of law.
4.	Mr Holl, for Customs, contends that the Appellant does not have a reasonable excuse because it knew there was a potential problem in October 2004 and apparently did nothing about it (or if they did something there was no evidence about it).  What a reasonable person would have done would be to contact Customs immediately on receiving that advice.  Apart from the point we have recorded in paragraph 2(6) above in relation to the calculation of the mitigation, he accepted that the Tribunal might wish to mitigate the penalty further.
5.	The primary question for us is whether the Appellant had a reasonable excuse for not registering until it did in August 2005.  The registration date of 1 June 2002 is entirely a result of Baker Tilly’s interpretation of the enhanced supervision contract, which, having seen the contract, is far from obvious.  We understand it to depend on the Appellant’s agreement to provide enhanced supervision in certain cases being an agreement to do something in return for a grant, as opposed to its being a condition for receiving a grant.  The fact that they approached the Home Office for the first time and agreed the result with Customs demonstrates the unusual and difficult nature of the problem.  We consider that a reasonable person in the position of the Appellant would have taken good advice on its VAT liability, particularly in a case like this where the trustees of a charity are not necessarily business persons; a schedule of the VAT status of the trustees shows that only two trustees were directors of VAT registered companies, four were directors or trustees of VAT registered charities or a housing association (which was not itself registered but may have been in a group registration), and nine trustees had no connection with VAT registration, one being company secretary of a company that was not VAT registered and had never traded.  Subject to the point that we consider below, our provisional view is that what the Appellant did constitutes a reasonable excuse.  If this were not the case there would be an incentive for unregistered persons to ignore any potential VAT problems and hope Customs never found out.  We consider that he Appellant’s conduct is to be applauded not discouraged by a penalty.
6.	We turn to consider whether this provisional conclusion is affected by Mr Holl’s contention that because the Appellant apparently did nothing after receiving Mazars’ advice in October 2004 that they were registrable for VAT, deprives them of their reasonable excuse defence.  Normally we would have agreed with him that failure to act on such advice would deprive a person of their reasonable excuse defence.  But with hindsight we know that the situation that Mazars had identified as a problem was not in fact a problem and the consultancy fees etc would not have made the Appellant registrable on their own in 2004.  In fact there is an advantage in the Appellant taking further advice (at their expense) rather than bothering Customs with something that turned out not to be a problem, which, if they had informed Customs, might well have cost them even more in advice in persuading Customs that it was a non-point.  We consider therefore that we are able to use hindsight to decide whether failure to inform Customs in October 2004 deprived the Appellant of its reasonable excuse defence.  The issues of registration on account of consultancy fees and of the enhanced supervision contract are entirely unconnected.  Suppose that the Appellant had consulted Customs in October in 2004, Customs would not have spotted the enhanced supervision contract issue and all that would have happened would have been an argument about consultancy fees that we now know would not have made the Appellant registrable.  Mr Holl’s contention amounts to saying that a person loses his reasonable excuse defence for the enhanced supervision contract issue because he did not consult Customs about something else that did in fact not make them registrable.  We cannot accept that as being what a reasonable person should do.  We are slightly hampered by not knowing what the advice was (although we entirely accept the Appellant’s right not to disclose this); it might, for example, have been to take further advice and the delay between their advice in October 2004 and Baker Tilly being instructed in January 2005 might have been accounted for by waiting for a trustees’ meeting or in finding someone suitable to give the further advice.  But we do not consider that should affect our conclusion.  We emphasise that this conclusion applies only when with hindsight the problem turns out to be a non-point.  Normally failure to inform Customs when advised that the person is registrable would deprive the person of his reasonable excuse defence for late registration.  Accordingly we do not consider that this pint changes the conclusion that we have reached that the Appellant had a reasonable excuse for the late registration.
7.	Accordingly we allow the appeal with the costs of, incidental to and consequent upon the appeal on the standard basis, to be determined by a Tribunal Chairman in default of agreement between the parties.

JOHN F AVERY JONES

CHAIRMAN
RELEASE DATE: 29 August 2006

LON/06/0537