Tax Tangle - "a vague and very likely muddled arrangement"

This tax tangle was apparent from the decision of a recent VAT tribunal case. Balkwill v Revenue & Customs [2009] UKFTT 314 (TC) (19 November 2009)

The case concerned a plumber who claimed that he sold his business and retired in 2001. He deregistered from VAT but continued to declare profits from the business on his personal tax returns. HMRC noted that the turnover being disclosed was just above the VAT registration threshold and claimed that he should have remained registered until 2004.

The evidence pointed to a most unusual arrangement between the ‘retired’ plumber and the Mr Smith to whom the business was sold in 2001. According to the Tribunal Judge "it very much sounded as if no accountant or solicitor had been involved in clarifying the form of what at best may have been a vague and very likely muddled arrangement".

At the time of the Tribunal hearing in July 2009, the plumber was over 80 years of age, in poor health and recently out of hospital. The taxpayer contended that he was living off the state pension and was unable in any case to pay a VAT assessment for over £19,000 plus interest.

The Tribunal judge accepted that HMRC had acted in proper manner and had evidence that VAT was properly due. However, it was not evident that the taxpayer made false claims but rather significantly misunderstood his filing requirements.

"we suspect that whatever the arrangement was it will have been vague and entirely capable of being misunderstood."

"this is not a case where we have fundamentally dis-believed all the Appellant's evidence. We frankly do not know what happened in this case, but we believe that there was probably some vague arrangement between the Appellant and Mr. Smith, and that the current confused state of affairs probably results from misunderstandings, rather than simply from a false claim by the Appellant who appreciates that he was trading at all times until 2004."

"we very much hope that HMRC will not proceed to try to collect any of the tax in dispute. "

As will be apparent from these quotes the taxpayer's appeal was dismissed but was accompanied by a strong plea from the Tribunal Judge that HMRC show considerable restraint in seeking payment of the assessment and penalties due and not proceed to collect any tax due.

Sadly I fear that the Tribunal Judge's plea will fall on deaf ears. We know that HMRC consider that they have no power to exercise such discretion. Recently they even planned to end their long standing practice to only pursue an 'equitable liability'. What chance they will agree not to pursue a liability that has been confirmed by the Tribunal.

The lesson for all is to avoid informal, muddled business arrangements. They invariably lead to trouble with the taxman.