Farming partnership wins appeal against £43,438 VAT penalty
© Scilly Flowers A farming partnership has won an appeal against a £43,438 VAT penalty, imposed because it failed to notify to HMRC of its liability to register for VAT.
The penalty arose because the Julian Partnership, a family business growing flowers on St Martin’s in the Isles of Scilly, was not aware of a rule change that had come into effect on 1 January 2021.
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The partnership consists of Andrew Julian and his wife Hilary, their son Ben and his wife Zoe, and Ben’s sister Amy, who is a partner but does not work in the business.
They grow flowers outdoors all year round on 14ha of Duchy of Cornwall let land. These are sold as gifts and posted to customers. The family also runs a small beef herd and two holiday cottages.
Having originally registered for VAT when the business began in 1987, the partnership subsequently opted in 1995 to join the agricultural flat rate scheme (AFRS).
This is an alternative to VAT registration which is designed to reduce the administrative burden on smaller agricultural businesses.
Under the AFRS, businesses apply a 4% addition to qualifying sales to VAT-registered customers but do not claim input tax.
The scheme suits certain circumstances and is used by about 2,000 farming businesses.
Changes to the scheme
In January 2021, measures included in the spring Budget of 2020 came into effect which changed the entry and exit criteria for the AFRS.
These made a business ineligible for the scheme if the total value of taxable supplies within a certain annual period was more than £230,000.
The change also introduced an obligation on a user of the scheme to notify HMRC if the £230,000 threshold was breached.
The changes were made in technical Value Added Tax (Amendment) Regulations 2020, which included a power for HMRC to withdraw an AFRS certificate in certain circumstances, including where supplies exceed the limit.
The Julian Partnership’s accountant discovered the changes by chance in April 2023 and notified the Julian family who asked her to contact HMRC to register the business for VAT and inform it of the failure to notify the breach of the £230,000 threshold.
The VAT arrears were agreed at £500,000 and a 20-month time-to-pay agreement negotiated.
In the event, Mr and Mrs Julian senior made a large loan to the partnership from their retirement savings, so the VAT owed was repaid within 12 months.
Penalty decision
In April 2024, HMRC informed Mr and Mrs Julian that it was imposing a penalty of £43,438, which was the minimum it could set, given that the failure was not deliberate, disclosure was unprompted and the Julians had fully co-operated with HMRC throughout.
Ben Julian said it was a great relief to win the appeal on the penalty.
However, he described the £500,000 which the business had to pay HMRC in back VAT, due for the period between the breach of the threshold and notification to HMRC, as “gut wrenching”.
As it was a sum due on past sales, the business had no opportunity of recovering this from the market.
HMRC has until 25 March to lodge an appeal.
Arguments in the case
The First-Tier Tribunal had to consider solely whether the Julians had a reasonable excuse for failing to notify their liability to register, in which case they would not be liable for the penalty.
The tribunal found in favour of the family business, as there had been very little publicity about the changes to the AFRS.
These were not set out in the Finance Act, nor were they contained in the Budget press releases.
HMRC’s litigator in the tribunal was unable to help it with the source of the announcement of the changes.
The appellants were unaware of the changes, they were farmers and had no expertise in tax, stated the tribunal decision.
“…lack of knowledge of particular tax requirements can, in appropriate circumstances, constitute a reasonable excuse,” it said.
The partnership’s accountant, who the tribunal found had operated in a diligent manner, became aware of the changes by chance in April 2023 when researching other farming reliefs.
The Julian Partnership’s case included that it has been unable to recover any of the output tax due for the pre-registration period, increasing the damage to its financial position.
HMRC – taxpayer duty
HMRC’s case included that it was unreasonable for it to be expected to contact individual taxpayers about changes in legislation and that it is the taxpayer’s duty to keep abreast of tax changes affecting their business, or to employ a suitable professional to do so.
It also maintained that the changes to the legislation were in the public domain, although its litigator at the tribunal did not know where the changes had been announced.