Misunderstanding between zero-rated and exempt sales

The taxpayer was a partnership comprised of two artists who sold paintings all over the world. The partnership was late registering for VAT in 2011 because it thought that exports of goods outside the EU were exempt from VAT so excluded from the registration tests. In fact, exports of goods outside the EU are zero rated and must be included in the tests.

HMRC considered whether an exemption from registration might be appropriate on the basis that the high level of zero-rated sales would create repayment VAT returns if the business was registered (VAT Notice 700/1, para 3.11). After a lengthy exchange of correspondence, it was decided that exemption was not correct. HMRC said the business should have registered from 1 April 2011 to 31 December 2011, and again from 1 April 2012 to 30 November 2012. The department issued late registration penalties of £958 for 2011 and £267 for 2012.

The taxpayer referred to receiving ‘conflicting advice’ from HMRC but the First-tier Tribunal found that this post-dated the instances of failure to register for VAT so, on its own, had not caused the failure to register.

However, the tribunal decided the taxpayer had a reasonable excuse for failing to register in 2011. It accepted the taxpayer genuinely misunderstood the difference between zero-rated and exempt sales. But for 2012, the tribunal said the partnership had appointed new accountants who were clearer in their understanding of VAT than their predecessors.

The penalty for 2011 was cancelled but that for 2012 upheld. The taxpayer’s appeal was allowed in part.

Neil Warren, independent VAT consultant, said: ‘The difference between exempt and zero-rated sales has caused confusion for years, both in terms of the registration threshold and also input tax recovery. An interesting aspect of this case was that HMRC applied its liable not liable (LNL) policy, recognising the periods when the business turnover fell below the deregistration threshold and therefore it did not seek output tax for these periods. Any adviser dealing with a late registration problem should ensure that HMRC always considers and adopts the LNL concession.’

Issue: 4721 / Categories: Tax cases