Getting The VAT Treatment Right

A Sorry Tale of Misunderstanding

There are three rates of VAT:

  • Standard rate of 20%;
  • Reduced rate of 5%; and
  • Zero rate.

There are also exempt supplies which do not attract VAT, but these are not the same as zero-rated supplies.

For the majority of contractors, the VAT treatment of their sales is straightforward enough, but there may be occasions when a transaction is not so clear cut. It is therefore vitally important that VAT-registered businesses apply the correct rate of VAT to a supply; otherwise, it could prove costly as poor Nathaniel Hendrickson discovered when he lost his recent appeal at the First Tier Tax Tribunal.


Mr Hendrickson was a retailer of motorcycle clothing and helmets. He had previously never run a business and had no knowledge of VAT. However, he was very interested in motorcycles and decided to try to make some money selling motorbike clothing on eBay.

The business commenced in 2001 with the selling of motorcycle helmets but this stopped and restarted again in 2012 but this time selling only motorcycle clothing (trousers and jackets). During that year the VAT registration threshold was reached and Hendrickson’s friend raised the subject of whether he was subject to VAT. Hendrickson had carried out a Google search on protective motorcycle clothing and the top result suggested that it was zero-rated. He could not afford professional advice at the time but when an accountant was subsequently consulted, she concurred with his conclusion.

In 2015, HMRC looked into Hendrickson’s affairs and informed him that he should have registered for VAT on 1st November 2012. Hendrickson’s accountant responded in a letter to HMRC and advised that his client was aware that once his sales reached the VAT registration limit, then he was required to register for VAT. However, internet research indicated that protective clothing was exempt, and he, therefore, considered that he did not need to register. The supplier of his motorcycle clothing also assured him that it was VAT exempt. All of the gear that he sold was kite marked and sold as protective clothing.

HMRC sent a letter to the accountant in January 2016 confirming that the only items that could attract zero rating would be motorcycle helmets but this did not extend to adult protective clothing.

In May 2016, HMRC issued Hendrickson with a VAT assessment for nearly £24,000 covering the period 1st November 2012 – 30th September 2014 (date business ceased). Two months later, HMRC issued a penalty notice for approximately £4,800 which was subsequently appealed. There was no right of appeal against the assessment.

At the time of the hearing, Mr Hendrickson was in a full-time job earning the minimum wage. He did not own a car nor his own home and had no savings. He admitted that it was a careless error for him to take advice from a well- established businessman and not contact HMRC.

Tribunal’s findings and decision

The Tribunal considered that Hendrickson’s failure to register for VAT was not deliberate and nor was it concealed, although it was prompted by HMRC’s investigation.

Although the Tribunal had great sympathy for Mr Hendrickson, ignorance of the law was not a reasonable excuse.

Little information was supplied as to who Hendrickson’s supplier or the businessperson were, or exactly what they told him or in what terms. However, even erroneous legal advice given by a third party such as a supplier, friend or acquaintance (even one who is considered knowledgeable) is not a reasonable excuse either.

The question as to whether the goods were standard or zero-rated was not a complex legal question that only a specialist could understand and a reasonable trader would have considered all the items to be standard rated unless there were particular reasons for believing differently.

A Google search would have returned a link to VAT notice 701/23, “Protective equipment”, which states that motorcycle helmets and protective boots and helmets for industrial use are zero-rated if certain requirements are met. For non-industrial use, the items are standard rated.

It was therefore concluded that Mr Hendrickson did not have a reasonable excuse for failing to register for VAT and his appeal failed.

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