REGISTRATION – Voluntary registration – Validity – Appellants not liable to be registered – Appellants applied for registration while not liable – Application accepted and Appellants registered from a date when they were not liable to be registered – Appellants confused about implications of applying for registration – FA 1994 Schedule 1 p9

LONDON TRIBUNAL CENTRE

	NICOLA LUDOVICO & MARCO DE MARTIIS 	Appellants
THE PARADISO ITALIAN RESTAURANT

-	and –

	THE COMMISSIONERS OF CUSTOMS AND EXCISE	Respondents

				Tribunal:	STEPHEN OLIVER QC   (Chairman)
						JOHN ROBINSON					 

Sitting in public in London on 27 April 2004

Richard Barlow instructed by David C Gorrod FCA, for the Appellants 

Adam Robb, instructed by the Solicitors for the Customs and Excise, for the Respondents

© CROWN COPYRIGHT 2004

DECISION

1.	A partnership of the two Appellants (Mr Nicola Ludovico and Mr Marco De Martiis) was registered for VAT with effect from 8 July 2001 following the partners’ submission of a VAT 1 form on 20 October 2001.  The partners’ sales had not reached the registration threshold until 1 December 2001.  An application was made to the Commissioners, by letter of 18 July 2002, for registration to take effect from 1 December 2001.  The Commissioners confirmed the decision that 8 July 2001 was the proper date of registration.  The partners appealed.

2.	The only issue in this appeal is whether registration from 8 July 2001 was effective.  If it was the partners became liable to account for VAT from that date; the partners have in fact accounted for VAT from 1 December 2001.  The Commissioners say that they registered the partners from 8 July 2001 because that was the date requested in the partners’ application for registration (their VAT 1 form).  The partners say that the application for registration should not have been read as an application to be registered from 8 July 2001.  It should, the partners say, have been evident from the entries in the form made by the partners that they could not have been applying for registration from that date; to the extent that the wording of the application might be read otherwise no reasonable person could, on the evidence, have formed the view that that reading represented the true intention of the partners.  Moreover, argue the partners, the Commissioners had misled themselves by proceeding on the basis that the business carried on by the partners with effect from 8 July 2001 had been transferred to them as a going concern.  

3.	We heard evidence from Mr Mario De Martiis.

4.	The relevant statutory provisions are VAT Act 1994 section 49(1) and the paragraphs from the registration code in Schedule 1 referred to below.

5.	Section 49(1) provides that where a business has been transferred by one taxable person to another taxable person as a going concern, then in determining whether the transferee is liable to be registered, he is treated as having been carried on that business before as well as after the transfer; the result is that the transferor’s supplies count as the transferee’s supplies in determining the latter’s liability to be registered.

6.	The specific registration rules in force in 2001 are summarized as follows:

(a)	a person making “taxable supplies” (i.e supplies of goods or services made in the United Kingdom other than exempt supplies: section 4(2)) becomes liable to be registered if at the end of any month his taxable supplies in the year then ending have exceeded £54,000 (Schedule 1 paragraph 1):

(b)	an unregistered transferee under a transfer of business as a going concern becomes liable to be registered if the value of his taxable supplies (deemed by Section 49(1) to include the transferor’s) in the period of one year to the date of transfer have exceeded £54,000 (Schedule 1 paragraph 2):

( c)	any person otherwise within (a) or (b) above does not become liable to be registered if the commissioners are satisfied that the value of his taxable supplies in the period that starts with the time when he would otherwise be required to be registered will not exceed £52,000 (Schedule 1 paragraph 3) but 

(d)	where a person who is not liable to be registered satisfies the commissioners that he makes taxable supplies “they shall if he so requests register him with effect from the date on which the request is made or from such earlier date as may be agreed between them and him” (Schedule 1 paragraph 9).

Facts : the registration

7.	Before setting out our findings of the overall factual background, we summarize the formal steps taken by the partners to register.  

8.	On 28 October 2001 the partners signed the VAT 1 form (application for registration).  The partners were Messrs Ludovico and De Martiis and both signed it.  

8.1	Question 6(a) asks – “Has your business been transferred to you as a going concern?”  The rubric following says – “Only give details here if you are taking over an existing business from someone else or if you have changed the legal status of your business”.  The partners response to the question was “No”.  But, despite the direction in the rubric, they filled in the “Date of Transfer” box as – 8 July 2001.  The name of the previous owner was filled in as – “Mrs Joy Barry” and the VAT registration of the previous owner was inserted.  Asked in question 6(b) whether they wanted to keep Mrs Barry’s VAT number, they said “No”.

8.2	Question 10 asks – “Have your taxable supplies in the last twelve months or less gone over the registration limit?”.  They replied – “No”.  

8.3	Question 11 asks – “Do you expect the taxable supplies you will make in the next thirty days alone will go over the registration limit?”.  The answer given was “Yes”.  

8.4	Question 12 asks  - “From what date must you be registered for VAT?”  (The rubric reads “If you have answered Yes to question 10 or 11 then give the date from which you have to be registered …” and “If you want to be registered from an earlier date fill in the date in the box provided”.)  The partners’ answers, using the words of the form, were – “I have to be registered from 8 July 2001” and “I would like to be registered from this earlier date – 8 July 2001”.

8.5	Question 13 is expressed in these words – “I do not need to be registered but I want to be registered”.  The rubric states – “Only answer this question if you have not yet reached the registration limit but want to be registered on a voluntary basis.”  The answer given by the partners, in the words of the form, was – “I want to be registered from 8 July 2001”.

8.6	Question 14 asks – “Please give the value of taxable supplies you think you will make in the next twelve months”.  The answer of the partners was “Not Known”.

8.7	Question 17 asks – “Do you think you will be repaid VAT regularly?”: the answer of the partners was “Yes”. 

9.	The Commissioners received the partners’ VAT 1 on 30 October 2001.  It was (according to the “Registration Case Progress Sheet”) passed to the processor at the Wolverhampton Business Centre on 3 November.  The first entry for “Action taken” was – “Check TOGC”.  An entry for 27 November reads “Phoned trader and confirmed name”.  There was then an entry – “OK to register”.

10.	Precisely what steps were taken to “Check TOGC”, we do not know.  The Commissioners had the VAT return of the Transferor (Mrs Barry trading as “The Brighton Motel”) for the first period of that trader’s business (11 January 2001- 28 February 2001) showing a turnover of £11,875; the 5/01 period shows a turnover of £17,598 and the 8/01 period return shows a turnover of £28,557.  On 2 October 2001 The Brighton Motel had notified the Commissioners that the “coffee shop was leased by others with effect from 7 July 2001”.

11.	A VAT return form (VAT 100) was sent by the Commissioners to the partners.  This contains the partners’ registration number.  The period for the return is specified as 8 July 2001 to 28 February 2002.  

Facts relating to the partners’ business, being relevant to the application to register

12.	It will be recalled that the partners’ case is that they never intended to register with effect from 8 July 2001 and any indication of such an intention in the VAT 1 application form had been a mistake on their part which should have been evident to the Commissioners.  And the partners contend that there had been no transfer of business as a going concern to them; consequently the Commissioners had registered them on a misunderstanding.  The findings of fact that follow are relevant to both these contentions.  

13.	The partners, Messrs Ludovico and De Martiis, had worked together at a previous restaurant.  Mr De Martiis had worked in the United Kingdom for twenty years, always in restaurants.  He had not previously owned a restaurant.  The transferor, Mrs Berry trading as The Brighton Motel, was proprietor of The Brighton Motel business in Peacehaven, Sussex. This comprised motel accommodation including a “coffee shop”.  The coffee shop was staffed by two employees. It served breakfast (full English if required) to people staying at the motel. It was open for light lunches serving hot soups, sandwiches and other snacks.  

14.	The partners started at the coffee shop on 8 July 2001. The two existing employees continued to work there. The lease to the partners from Mrs Berry (and three others) is dated 15 November 2001 but has a start date of 8 July. The rent payable is £10,000 starting from 8 October 2001.  

15.	The “property” leased to the partners is described as “the Restaurant and Coffee Shop of the Motel … together with the landlord’s fixtures, fittings and equipment”.  The partners as tenants covenanted to use the property only for “Permitted Use” i.e. as a restaurant and coffee shop with ancillary store and offices; and they covenanted to keep it open during “Opening Hours” (i.e. from 7 to 10.30am, seven days a week) and to provide an English breakfast menu every day.  They also covenanted to provide catering to the Motel conference and function guests as and when agreed.

16.	“Landlords Fixtures and Fittings and Equipment” were listed in an inventory to the lease.  “Fixtures and Fittings” included light fittings, carpets, sinks, shelves, optic fittings, loudspeakers and counters.  “Furniture” included some thirty tables and ninety chairs, worktables and pot plants.  “Equipment” included freezers, freezer/display units, drinks fridge, upright and under-counter fridges, cash-registers, kettles, microwaves, range, hotplate, grill toasters, sandwich makers, blender and fans.  “Utensils” included trays, pots and pans, sieves, colanders and steamers.  “Crockery and Cutlery” covered numerous items.  “Glassware” covered about a hundred glasses.

17.	Nothing was paid for “goodwill”.  Nothing other than the rent was paid for the right to use the furnishings and fittings and equipment.  Minimal food was taken over by the partners from Mrs Berry.  

18.	The partners had learnt from Mrs Berry that takings were seasonal, ranging from £400-£700 per week.  She had told the partners that she needed them to serve breakfasts as an attraction for her own business.  July, when the partners started trading, was the busiest time of the year and the partners’ sales were, as expected, £700 a week.  These actually produced “losses”.  The partners were charging the same prices as were charged for 8 July 2001.  Over the next few weeks the partners introduced new items on the menu.  They then started to open in the evenings. 

19.	The motel side of The Brighton Marina business continued to be carried on by Mrs Berry after 7 July 2001.  As noted in paragraph 10 above it had been registered in January 2001.  A projection of the sales figures referred to in that paragraph shows a turnover of some £78,000 for the year 2001.  

20.	The partners wanted their VAT affairs to be right.  Mr Ludovico had had more experience of VAT than Mr De Martiis.  They took no advice but registered because they thought that was the right thing to do, from the VAT point of view.  Mr Ludovico filled in the VAT 1 form and both partners signed it.  Later, at the end of 2001 or the beginning of 2002, the partners engaged an accountant (Mr Gorrod) who raised the matter of the proper registration date with the Commissioners, initially by letter of January 2002.  

21.	The partners filled in the VAT return (with the period 8 July 2001 to 28 February 2002 printed on it).  The figures for sales and purchases and VAT due in their return related only to the period from 1 December 2001 to 28 February 2002.  (A subsequent assessment has been issued to cover the VAT due from 8 July 2001 to 30 November 2001.)

22.	On 18 July 2002 Mr Gorrod, the partners’ accountant wrote to the Commissioners pointing out –

“My client Nicola Ludovico was obviously confused when he completed the VAT 1 without my assistance and this is the first time I have seen the form.  

I notice he has ticked Yes to Box 11 – but I have now prepared accounts to 5 April 2002 and turnover in the first 30 days was only £8,684.  

It therefore follows that Box 12 was also incorrect as he did not have to be registered and likewise Box 13 was also incorrect!

I will be obliged if you would therefore review the case on the basis that the VAT 1 was incorrectly completed and accept my request for compulsory re-registration from 1 December 2001 following sales in excess of the registration threshold.”

Was the Coffee Shop activity transferred to the partners as a going concern?

23.	The Coffee Shop activity conducted by Mrs Berry as part of The Brighton Motel business had the following common features with the activities conducted after 8 July 2001 by the partners:

(i)	the name was the same;
(ii)	the breakfast customers were from the same source, i.e. motel guests,
(iii)	the prices for breakfast were the same;
(iv)	the venue was the same as were the furnishings and fittings and 	equipment (though after the partners had taken over they added to 	these) and
(v)	the staff were the same.

The rights of occupation given to the partners by the lease effectively precluded Mrs Berry from carrying on any comparable business in and around the hotel.  We recognise that there was no formal assignment of or payment for goodwill; and the partners were free to develop the activities in the Coffee Shop beyond serving breakfast and snack lunches, and they did so.  Nevertheless it seems to us that the partners did carry on in the Coffee Shop substantially the same business as had been carried on by Mrs Berry before them.  That at least is the position at the time of the transfer; the existing business was the core upon which the partners developed their activities in the manner referred to above.  On this basis, we think that there was a transfer of the Coffee Shop part of The Brighton Motel business as a going concern from Mrs Berry as transferor to the partners as transferees.

24.	The Coffee Shop part of The Brighton Motel undertaking was, we think, a separate free-standing business.  The value of its supplies, taken on their own, was well below the registration threshold.  The partners were not therefore, on the strength of the transferor’s supplies, liable (by virtue of paragraph 2 of Schedule 1) to register on 8 July 2001.  

Are the partners bound by the registration with effect from 8 July 2001 following their application?

25.	On the face of it the application to register (in the VAT 1 form) signed on 28 October 2001 reads as an application to be registered with effect from 8 July 2001.  The issue by the Commissioners of the VAT return form showing the partners as registered from 8 July 2001 demonstrates that the Commissioners have, in pursuance of Schedule 1 paragraph 9, agreed to register from that earlier date.  

26.	There is, as Mr Richard Barlow for the partners pointed out, an inconsistency in the partners’ answers to the two limbs of question 6 in the VAT 1 questionnaire.  They ticked “No”, when asked if there had been a transfer of business as a going concern and yet they went on to state that there had been a transfer from Mrs Berry on 8 July 2001.  We have already concluded that, had the partners properly understood the expression “transfer of business as a going concern”, they should have ticked the “Yes” Box. However, by supplying the name and registration number of the transferor, they gave the Commissioners access to information about the transferor’s business whose turnover, taking it as a single business, was likely to overtop the registration threshold.  

27.	The partners’ answer to question 10, i.e. that the taxable supplies had not gone over the registration threshold in the twelve months to 28 October, was correct.  Their answer to question 11, i.e. that they expected their taxable supplies to overtop £53,000 in the next thirty days alone (i.e to 28 November), was plainly incorrect.  But it did not debar them from applying for voluntary registration under Schedule 1 paragraph 9, nor the Commissioners from agreeing to voluntary registration.  

28.	The partners’ answer to the first limb of question 12, i.e. that they had to be registered from 8 July 2001, was wrong, even if there had been a transfer of business as a going concern in relation to the Coffee Shop activity.  Their answer to the second limb of question 12, i.e. that they would like to be registered from 8 July 2001, was not wrong; it reads as if they were quite properly exercising their right to apply for voluntary registration under Schedule 1 paragraph 9.  The same can be said of their apparent request, in their answer to question 13, to be registered from 8 July 2001.  

29.	The answer to question 17, i.e. that the partners thought they would be repaid VAT regularly, must have been wrong, or at least most unlikely. Restaurants operating as going concerns are, save in exceptional situations, “payment” traders.  But, even if the answer was wrong, the fact that it was given does not debar the partners from making a voluntary application for registration under Schedule 1 paragraph 9 if they wish.  

30.	We heard evidence from Mr De Martiis but not from Mr Ludovico.  We accept that Mr De Martiis would not have signed the VAT 1 form with a request to be registered from 8 July 2001 had he been properly advised as to the implications of the request.  We cannot safely infer the same of Mr Ludovico.  All we know is that once the partners had engaged the services of an accountant it became apparent that they need not have registered until at least 1 December 2001.  They had unwittingly exposed themselves to tax on their meagre sales from 8 July 2001 until 30 November 2001.  

31.	To summarize the position so far, we think that the partners meant to register with effect from 8 July 2001 but they would not have done so had they been properly advised when they submitted their VAT 1 form on 28 October 2001.  It could, and perhaps should, have been apparent to the Commissioners, when considering the VAT 1 form, that they were dealing with conscientious but muddled novices to the VAT regime.  At the same time the partners were doing what they were entitled to do, namely requesting early registration; and none of their one inconsistent and their two erroneous answers operated to disqualify them from applying for registration with effect from 8 July 2001.  It follows that the Commissioners agreed to a legitimate request for voluntary registration from 8 July 2001 and their registration from that date cannot be faulted.  Registration in pursuance of Schedule 1 paragraph 9 from 8 July 2001 was therefore valid.

Conclusion

32.	We are driven, with regret, to dismiss the appeal.  Had the partners known the implications of what they were doing, they should never have applied for registration from a date when they were not liable to be registered. A more sensitive administration on the Commissioners’ part should have picked up the muddled responses of the partners and their evident need of help. But it is not for us to correct that.  Only the Commissioners have that discretion.  

33.	The appeal is dismissed.

STEPHEN OLIVER QC
CHAIRMAN

RELEASED:
LON/03/630