VAT Flat Rate Scheme allowed with
retrospective effect
First Tier Tribunal TC2738, 05 June 2013
Case in brief:
The appellant, an accountant, in this case set up a management consultancy business as a sole trader and based on his forecast sales registered for VAT with effect from 2 January 2007. Based on his projections he would not have been eligible to register under the Flat Rate Scheme (FRS) as the turnover projected exceeded £150,000. But his consultancy business didn’t work out as expected and finally on 31 January 2012, he requested HMRC noting that he had never reached the threshold for mandatory VAT registration, and that he be deregistered with effect from 31 December 2011. He also requested that the period of his VAT registration from 2 January 2007 to 31 December 2011 be converted retrospectively to the FRS. HMRC rejected the request for retrospective registration under the FRS, got the same response upon internal review.
The regulatory background:
Regulation 55B(1)(b) of VAT Regulations 1995 gives HMRC the power to give an earlier registration date than the date of application. HMRC guidance FRS3200 states that this must be used reasonably in the circumstances of each case and if an application for retrospective registration is refused HMRC should explain the reason and indicate the main factors that were taken into account in reaching the decision. HMRC guidance FRS3300 further states that the policy is to refuse retrospection where the business has already calculated its VAT liability for the period(s) using a different accounting method. The reason for this is that the FRS exists to simplify VAT accounting and record keeping for small businesses, so that they are able to spend less time on VAT. If allowing retrospection will enable the business to benefit in this way, then HMRC ought to consider granting the request. It also states that HMRC should be prepared to recognise exceptional circumstances where the policy should be set aside. In principle, such cases are likely to involve compassionate circumstances, or the survival of the business.
S. 83(1)(fza) of the Value Added Tax Act 1994 provides for an appeal to the tribunal against a decision of HMRC refusing or withdrawing authorisation to use the FRS, and s.84(4ZA) of the Act 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”.
Tribunal decision:
The tribunal found that the HMRC decision did not consider the specific circumstances invoked by the appellant, nor did the review decision consider the submissions. In its view the appellant had had good reason at the outset for thinking that his turnover would be above the threshold for VAT registration and above the threshold making him ineligible for the FRS. His expectations turned out to be catastrophically wrong, which he could not have foreseen. Nonetheless he did not apply for the FRS earlier because he still had expectations that the situation would improve, which also proved to be wrong. So catastrophically wrong were his expectations that he need never have registered for VAT at all, and was currently suffering considerable financial hardship. The HMRC decisions do not consider whether this peculiar combination of circumstances amounted to exceptional circumstances that would justify granting retrospective application of the FRS. The tribunal also noted that the HMRC decision maker did not consider all of the circumstances advanced by the appellant, and had not properly applied the guidance.
The appeal was allowed and the case decided in favour of the taxpayer.
Tax Partners