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The VAT regime is far from straightforward and anyone going into business on their own account should take professional tax advice at the outset. In a striking case on point, a driving instructor who was recovering from a life-threatening bout of COVID-19 had reason to regret his ignorance of the law.
The man had initially worked in the so-called gig economy as a franchisee courier for a logistics company. He was self-employed but the company arranged for him to be registered for VAT so that he could reclaim tax paid on his petrol and franchise fees. When he moved on and became a self-employed driving instructor, he maintained his VAT registration and continued to claim back tax as before.
Due to his complete lack of understanding of the VAT system, he did not charge VAT to his clients and failed to keep all the VAT receipts he should have done. After an investigation by HM Revenue and Customs (HMRC), retrospective VAT assessments were raised against him totalling more than £20,000.
Ruling on his challenge to those bills, the First-tier Tribunal (FTT) noted that his income fell far below the threshold at which registration for VAT is compulsory. Due to his ongoing registration, however, he was required to charge his customers VAT on his taxable outputs. Although he was entitled to reclaim input tax on his petrol costs and other allowable business expenses, he was obliged to retain VAT receipts or other evidence of relevant transactions that would be acceptable to HMRC.
In upholding his appeal in part, the FTT noted that he had presented other evidence, including bank statements, in an attempt to fill in gaps in the trail of VAT receipts. HMRC had in some respects failed to exercise its discretion whether to allow his input tax claims in the light of that evidence. Some of the assessments were set aside and the man's overall bill was reduced to £3,408.
The FTT noted the possibility of further VAT assessments being raised against him. However, it urged HMRC to take into account his perilous state of health when deciding whether or not to take such a course. Together with a chronic kidney condition, which required daily dialysis, he had recently spent two months in hospital suffering from COVID-19, including three weeks in intensive care on a ventilator.
The assessments had also had a serious impact on his mental health and the FTT observed that, after his defaults were identified, he had responded to HMRC's inquiries in an honest and straightforward manner.