In Geoffrey Seeff t/a TPL Associates v HMRC TC02738  a Chartered Accountant was successful in a claim for retrospective authorisation to use the VAT Flat Rate scheme.
He registered for VAT in 2007. His business was not as successful as he anticipated and he applied to HMRC to deregister in 2011. He also applied for retrospective inclusion on the VAT Flat Rate Scheme. HMRC refused him and so he made an appeal to the First Tier Tribunal (FTT).
The accountant argued that:
- At no time during the period of VAT registration had his turnover reached the mandatory threshold for registration.
- His management consultancy business was severely affected by the financial crisis of 2008.
- The failure to secure the expected turnover and the economic downturn has caused immense financial difficulty for him personally.
- He disadvantaged himself and exacerbated his financial difficulties by not converting his registration to the FRS.
The accountant would have qualified for the FRS for the whole of the period that he was registered for VAT. His VAT liability for the whole period of his VAT registration using the standard basis of accounting was £23,997. His total liability under the FRS would be £21,846, a difference of £2,151.
Regulation 55B(1)(b) of the VAT Regulations 1995 gives HMRC the power to allow a retrospective start date for the FRS. 12.
HMRC’s guidance at FRS3200 provides that the power to allow retrospective applications is one that HMRC must “use reasonably in the circumstances of each case”, that the decision maker must “consider all the relevant facts”, and must explain the main reasons and indicate the main factors taken into account if the decision is to refuse.
FRS3300 lists factors to be taken into account by the decision maker under four bullet points.
• Each case should be considered on its own merits. The fact that less tax would be paid under the FRS is not “sufficient” reason to authorise use of the scheme retrospectively, but it does not state that this is a wholly irrelevant consideration.
• Authorisation may be refused if this would present a revenue risk.
• The purpose of the FRS is to simplify VAT accounting, “The policy is to refuse retrospection where the business has already calculated its VAT liability ... using a different accounting method”, subject to the fourth bullet point.
• There may be “exceptional circumstances” where this policy should not apply, and that such cases are “likely to involve compassionate circumstances, or the survival of the business”. It is added that HMRC “have not identified to date any case where such circumstances justify a departure from the normal policy”.
Section 83(1)(fza) VATA provides for an appeal to the Tribunal against a decision of HMRC refusing or withdrawing authorisation to use the FRS.
Section 84(4ZA) VATA provides that “the tribunal shall not allow the appeal unless it considers that [HMRC] could not reasonably have been satisfied that there were grounds for the decision”.
HMRC accepted that if the Tribunal considered that HMRC could not reasonably have been satisfied that there were grounds for the HMRC decision, the Tribunal could substitute its own decision on the Appellant’s application for retrospective application of the FRS.
HMRC had refused a retrospective change as follows “In order for retrospective entry due to exceptional circumstances to apply there would need to be firm evidence that a trader would be put out of business as a direct result of a decision to refuse retrospection. In your case it appears the business has already ceased to trade and retrospection cannot be allowed simply to reduce any outstanding tax due”.
The FTT noted that HMRC's decision did not consider whether or not there were exceptional circumstances and that it did not address the representations made by the taxpayer or reach a conclusion on whether those representations amounted to exceptional circumstances. It also noted that HMRC was wrong: the business had not ceased trading.
The FTT allowed the appeal having decided that it was satisfied that there were exceptional circumstances justifying retrospectivity.
It said that "It is not a simple case of a business being unaware of the FRS, or simply realising after the event that less tax would have been paid under the FRS. It is a case where reasonable expectations proved unforeseeably to be catastrophically wrong, to the extent that the Appellant fell far short of the threshold for registering for VAT at all, and where the Appellant is now suffering considerable financial hardship."
An interesting one: if HMRC had made its decision making process more clear and followed the bullet points of its own guidance this might have gone the other way. It seems HMRC made a mistake in thinking that the business had ceased trading.
The FTT also made some observations, which we did not report above because they do not set any legal precedent (and so may be of little use when making an appeal), but we do so here because we feel that they add to the debate as to role of HMRC and what we all would like to see in our tax system. The judge noted that:
- HMRC have a duty to advise taxpayers of their options, in particular of the availability of the FRS, where it is apparent from returns that it would apply, or when a business is no longer required to be registered for VAT at all.
- It is not equitable that two businesses with the same turnover trading in the same circumstances could be liable to different amounts of tax, merely as a consequence of their different expectations at a given point in time as to what may happen in the future.
- If a business registered for the FRS exceeded the threshold for the scheme, HMRC would seek to claw back the additional tax liability. HMRC should be required, conversely, to repay the additional VAT in cases where a business did not register because it thought it would exceed the threshold, but then ultimately did not.
- Although HMRC state that the FRS was introduced to ease the administrative burden placed on small traders, in fact it does not achieve this purpose, and the scheme is perceived by the general business community as a tax incentive for small businesses which is only ever used when it is financially advantageous to the business.
Maybe it is time to look at the FRS again?