VAT Flat Rate Scheme:
Category change allowed retrospectively
First-tier Tribunal, TC02151, AML Consulting Ltd, 24 July 2012
Dr Lynch had been a director in the NHS until she was made redundant in 2007. She then set up a company, AML Consulting Ltd, to provide management services to the NHS and got it registered for VAT with effect from 21 September 2007, the intended business activity being stated as “Management Consultancy”. On 10 December 2007, the company applied to join the FRS selecting the “Management Consultancy” sector anticipating that the majority of her business would derive from the provision of management consultancy services. She soon found out that this was an area dominated by the major firms and it was not going to be possible for such a small organisation as hers to break into this field. Therefore, from October to December 2007 she acted as an interim manager, filling a temporary gap, for Bury PCT followed by acting as a project manager for Greenwich PCT. Both these roles were part time for two or three days a week and in between she did a few small jobs such as training. There was, therefore, a major difference between what she had intended to do and what she ended up doing. As her first year of trading went on she realised that her chosen sector for the FRS had been
incorrect. Rather than “Management Consultancy” she should have opted for “business services not listed elsewhere”. The former sector attracts a flat-rate percentage of 12.5% the latter 11%. As a newly registered trader AML would have been entitled to a 1% reduction in the flat rate for the first year of trading – i.e. until 20 September 2008. So she applied to HMRC to back-date the chosen category. As the Flat Rate Scheme a is self-assessing one it is ultimately up to the trader to make an informed choice as to which trade sector percentage they apply to their business they will be held accountable if the choice isn’t correct. On that basis it is the policy of HM Revenue and Customs not to back date percentage changes and therefore no claims are made for past overpayments. Therefore, HMRC rejected the request.
It was quite clear to the tribunal, and it was unchallenged, that Dr Lynch’s original intention was to provide management consultancy services. The tribunal noted that a decision which was reasonable at the time it was made did not render it unreasonable in the light of subsequent events, or, as in this case, when things did not turn out quite as envisaged at the time of choice. It might prove to have been the wrong decision but if there were reasonable grounds for making the decision in the first place, subsequent events do not change that. At the time of her application, Dr Lynch, experienced in the ways of the NHS, sincerely believed that she could make a go of management consultancy and that is what she intended to do. HMRC rejection letter simply asserted that “it is the policy of HMRC not to back date percentage changes ……”. This in itself, in the tribunal’s view, did not appear to be a correct interpretation of the Commissioners’ policy. The Commissioners’ current policy was quite clearly to allow a change if the original choice was unreasonable. There was no indication that HMRC took any account of the reasonableness of the original choice. On that basis the appeal was allowed.
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