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In the Charles John Caton First Tier tribunal (FTT) case the issue was whether HMRC were correct in deciding that a business was artificially split to avoid VAT registration (so called disaggregation, details here).
Background
The appellant ran a café known as The Commonwealth for a number of years. Subsequently, his wife opened a restaurant in adjoining premises. HMRC decided that this was a single business and required a backdated VAT registration. This resulted in a retrospective VAT return and associated penalties for late registration.
HMRC pointed to the leases, the liability insurance and the alcohol licence, which are all in Mr Caton’s name, together with the fact he signed a questionnaire stating that he was sole proprietor of the restaurant, and the fact that the washing up area is shared, and say that these show that there was only one business. They also said that the fact that Mrs Caton did not have a bank account and therefore card takings from the restaurant went into Mr Caton’s bank account further bolsters their case.
The appellant proffered the following facts to support the contention that there were two separate businesses: There were separate staff in the restaurant and the café. Those for the cafe were hired by Mr Caton, and are his responsibility, and those for the restaurant were hired by Mrs Caton and are her responsibility. The cooking is done completely separately, by different people using different cooking areas. The menus are completely different, and when the café sells the restaurant ‘specials’ they are rung up on the till with a marker that shows they are restaurant sales. Although the majority of the food is ordered from the same place, there are separate orders (even though these orders are placed at the same time and paid for using Mr Caton’s bank account). Mrs Caton decides on the menu for the restaurant and the prices. She keeps the cash generated from the sales in the cafe, and this is not banked in Mr Caton’s account. Depending on the ratio of cash sales to card sales in any given month, she may need to pay some of it to Mr Caton for the rent, rates etc, but any surplus she keeps.There were two tills, one for the restaurant and one for the cafe.
The Law
The VAT Act 1994, Schedule 1 para 1A provides that:
(1) Paragraph 2 below is for the purpose of preventing the maintenance or creation of any artificial separation of business activities carried on by two or more persons from resulting in an avoidance of VAT.
(2) In determining for the purposes of sub-paragraph (1) above whether any separation of business activities is artificial, regard shall be had to the extent to which the different persons carrying on those activities are closely bound to one another by financial, economic and organisational links.
VAT Act 1994, Schedule 1 para 2 provides that:
(1)… if the Commissioners make a direction under this paragraph, the persons named in the direction shall be treated as a single taxable person carrying on the activities of a business described in the direction…
Decision
The judge decided that she considered the facts that point to the businesses being run and owned as two separate operations were significantly stronger that facts that point to a joint ownership. And the appeal was allowed.
Commentary
These types of cases are decided on the precise facts. I think that this one must have been a close call. It appears the fact that may have swung it was that the judge commented “We find it extremely surprising, in this case, that HMRC have never met with Mrs Caton or, in correspondence, asked her for any details. Mr Caton and HMRC have both told us that he has consistently maintained from the first meeting the fact that Mrs Caton runs the restaurant. We find it impossible that HMRC could be in possession of facts sufficient to make a reasonable decision on this case without hearing from Mrs Caton.” That approach by HMRC is never going to play well in court. It strikes me that this type of approach is increasing in the department. Whether this is down to lack of training, resources or simple corner cutting to save time I cannot say.
If HMRC issue a direction under VAT Act 1994, Schedule 1 para 2 that two or more businesses should be treated as one, it is always worth having that decision reviewed. This is especially relevant in cases such as this where customers are the final consumers making the VAT sticking tax.