1. Introduction

The case of Gardner & Co v. Revenue & Customs [2011] UKFTT 470 (TC) serves as a pivotal reference in understanding the criteria under which VAT registrations may be cancelled by HMRC. This commentary delves into the background of the case, the key legal issues at stake, the arguments presented by both parties, and the implications of the Tribunal's decision on future VAT-related matters.

2. Summary of the Judgment

Michael Gardner, operating as Gardner & Co., appealed against HMRC's decision to cancel his VAT registration. The cancellation was predicated on the assertion that Gardner was neither trading nor had traded for the past five years. The Tribunal examined whether Gardner was still engaged in economic activities that justified his VAT registration. It was determined that Gardner had entered into an agreement to undertake building work, which constituted economic activity. Consequently, the Tribunal held that HMRC was incorrect in canceling the VAT registration effective from August 10, 2009. Additionally, the Tribunal addressed the recoverability of input tax, directing the parties to reassess the recoverable amounts based on the decision.

3. Analysis

3.1 Precedents Cited

The Tribunal extensively referenced several precedents to substantiate its decision:

• Rompelman v Minister van Financ en (1985): This case clarified the interpretation of economic activity within the VAT Directive, emphasizing that preparatory acts towards a business venture are considered economic activities.
• Morrison's Academy Boarding Houses Association v Customs and Excise Commissioners (1978): Addressed whether non-profit activities could be deemed economic for VAT purposes, concluding that the profit motive is not a definitive criterion.
• Lord Fisher v Customs and Excise Commissioners (1981): Expanded on the definition of economic activity, indicating that activities pursued for pleasure or social enjoyment do not constitute a business.
• Inverstrand BV v Staatssecretaris van Financ en (2008): Reinforced the necessity of a direct and immediate link between input costs and taxable outputs, while acknowledging that general business expenses can be recoverable.
• Rosner v Customs and Excise Commissioners (1994): Highlighted the necessity of a nexus between business expenditures and the purpose of the business for input tax recovery.

3.2 Legal Reasoning

The core legal issue revolved around whether Gardner was still engaged in an economic activity that warranted maintaining his VAT registration. HMRC argued that Gardner had ceased trading, referencing the absence of taxable supplies since 2004. However, the Tribunal focused on the existence of a preparatory agreement to undertake building work, which, according to Rompelman, qualifies as economic activity. The Tribunal emphasized that the intention and actions towards engaging in business activities must be substantiated with objective evidence, rather than mere declarations.

Regarding the recoverability of input tax, the Tribunal adhered to the principle established in Inverstrand, determining that only those costs directly attributable to taxable supplies are recoverable. Expenses related to bankruptcy proceedings and legal actions were excluded, as they did not constitute cost components of Gardner's business.

3.3 Impact

The judgment reinforces the breadth of activities considered as economic under VAT regulations, including preparatory steps towards business ventures. This has significant implications for VAT registration cancellations, ensuring that HMRC must rigorously assess the continuity of economic activities before proceeding with deregistration. Additionally, the decision provides clarity on the scope of input tax recoverability, delineating which expenses qualify based on their direct relevance to business operations.

4. Complex Concepts Simplified

4.1 Economic Activity

Economic Activity refers to actions undertaken with the intent to provide goods or services in the course of a business. This encompasses not only active trading but also preparatory steps like entering into agreements or planning projects that facilitate future business operations.

4.2 VAT Registration and Deregistration

VAT Registration is mandatory for businesses whose taxable turnover exceeds a certain threshold. Deregistration occurs when a business ceases to meet the criteria for VAT registration, either by falling below the turnover threshold or by stopping trading activities altogether.

4.3 Input Tax Recoverability

Input Tax refers to VAT that a business pays on purchases related to its taxable activities. The recoverability of input tax is contingent upon whether the expenses are directly related to the business's taxable supplies. General business expenses may be recoverable, while personal or unrelated expenses are not.

5. Conclusion

The Tribunal's decision in Gardner & Co v. HMRC underscores the necessity for HMRC to meticulously evaluate ongoing economic activities before proceeding with VAT deregistration. By recognizing preparatory agreements as valid economic activities, the judgment ensures that businesses with intent and steps towards resuming operations retain their VAT registration status. Furthermore, the stringent criteria for input tax recovery emphasize the importance of aligning business expenditures with taxable outputs. This case sets a significant precedent, guiding both tax authorities and businesses in navigating the complexities of VAT regulations.