Don’t copy the self-employed artist who didn’t register for VAT

The courts might have found in his favour, but a self-employed artist should serve as a reminder to other creative freelancers about when to register for VAT, assuming they want to avoid hassle and hefty penalties from the taxman, writes Martin McKechnie, a director at the Low Tax Group.

That’s because a recent First-tier Tribunal case concerned the taxpayer’s appeal against a belated notification penalty in respect of his failure to register for VAT at the correct time.

The taxpayer, a self-employed artist, made his money from selling paintings and other artwork through galleries. The taxpayer’s self-assessment return for 2006/07 showed his sales for the year were £85,970 including VAT.

His failure to register for VAT was not discovered until an enquiry into the taxpayer’s affairs in early 2011. The taxpayer accepted that he should have registered for VAT at the time and that his reliance on his accountants did not constitute a reasonable excuse.

As to what HMRC guidelines said, the VAT registration limit for 2006/07 was £61,000. The belated notification penalty issued by HMRC was for £1,905.

But the taxpayer appealed on the basis that the penalty should be mitigated because he had overpaid Income Tax for the same period, i.e. he paid Income Tax on the full amount of his turnover rather than the VAT-exclusive part of his turnover as would have been the case had he registered for VAT at the correct time.

The amount of overpaid Income Tax was £2,593 and the taxpayer argued that HMRC had received an overpayment of Income Tax which was £600 more than the belated notification penalty.The time limits precluded the taxpayer from making a claim for overpaid Income Tax.

However, the judge was clear that in the circumstances, HMRC have in any event been enriched by some £600 and would be enriched by a greater amount were we not to mitigate the penalty now.” The First-tier Tribunal accepted the taxpayer’s arguments and mitigated the penalty in full.





5th November 2012

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