In Holy Cow! Ice Cream Company Ltd v HMRC [2019] TC7400 the FTT denied a loss making business' appeal to backdate entry into the VAT Flat Rate Scheme (FRS). Although survivial of the business was an issue, VAT returns had already been filed and the directors were propping up the company personally.
- The Company began trading in 2016 and registered for VAT in that year.
- The Directors over-estimated the Company’s turnover and profits, and it began to make losses.
- In August 2017 the Company applied to enter the VAT Flat Rate Scheme ('FRS') with effect from 1 January 2017.
HMRC granted the application on 10 November 2017, but only with effect from 1 July 2017 on the basis of HMRC’s guidance which states that backdating is not allowed for VAT periods for which a trader has already calculated its liability, because “the FRS exists to simplify VAT accounting and record keeping for small businesses”. HMRC’s guidance also states that this policy may be disapplied in “exceptional circumstances”, such as where “the survival of the business” is in issue.
The Company appealed against the refusal to backdate for the first two quarters, on the basis that it was within the “exceptional circumstances” part of HMRC’s guidance.
The FTT considered 'exceptional circumstances': it found it difficult to think of any such situations where they may exist.
- If a taxpayer has already accounted for VAT in the past on the normal basis, and in accordance with the general law then in force, there is no way in which retrospective admission to the scheme can simplify the accounting exercise that he has already carried out.
- It concluded that HMRC could not use its discretion in order to provide funds for a struggling business.
The FTT rejected the appeal, deciding that:
- If HMRC were to exercise its discretion so as to put a trader into the FRS for a VAT period in relation to which a return had already been submitted, in order to provide a refund to a trader in difficulties, HMRC would have acted ultra vires its discretion and unreasonably.
- In other words, HMRC would have failed to consider a relevant matter, (the purpose of the FRS scheme) and would have taken into account an irrelevant matter (the effect of a cash refund on the trader).
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