England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand London WC2A 2LL
		10 June 2009

MR JUSTICE HENDERSON:

Introduction

1. This is an appeal by The Commissioners for Her Majesty's Revenue and Customs (HMRC) from a decision of the VAT and Duties Tribunal released on 24 November 2008 following a hearing at the Manchester Tribunal Centre on 1 October 2008. The Tribunal was chaired by Mr David Porter and the other member was Miss Susan Stott.
2. The Tribunal had before it an appeal by Mr David Eric Burke against the refusal by HMRC to allow him retrospective entry into the Flat-Rate Scheme provided for in section 26B of the Value Added Tax Act 1994. As I will explain, Mr Burke had asked to be allowed to enter the scheme with effect from its inception in 2002.
3. The Tribunal held that HMRC had acted unreasonably in refusing to allow Mr Burke to enter the scheme retrospectively, and concluded that he should have been allowed to enter it from a date three years before the last period for which he had paid and accounted for VAT on the normal basis, that is to say the quarter beginning in October 2007.
4. HMRC now appeal to this Court, contending that the Tribunal erred in law in reaching the above determination. They have been represented before me, as they were before the Tribunal, by Mr Nigel Bird of Counsel. Mr Burke appeared in person before the Tribunal and was intending to attend today's hearing as well. However, he informed the Court yesterday that he would be unable to do so for family reasons. He made it clear that he was not asking for the hearing to be adjourned. In those circumstances, I decided to proceed with the hearing in his absence.
5. Mr Bird emphasised at the start of his submissions that HMRC make no criticisms at all of the way in which Mr Burke has conducted himself throughout this matter, and I should also record that he was accepted as a candid and honest witness by the Tribunal.

The Flat-Rate Scheme

6. In the normal way, a trader who is registered for VAT has to account for and pay tax on a quarterly basis. The tax which he pays is the difference between the output tax due on the goods or services which he supplies to his customers and the input tax which he has paid on the goods and services used for the purposes of his business during the relevant period. In order to operate this system, the trader needs to keep accurate records, to prepare quarterly accounts, and to preserve all relevant documentation relating both to the output and to the input sides of his business.
7. Although Article 24 of the Sixth VAT Directive authorised member states of the European Union to introduce revenue-neutral schemes with the object of simplifying the administration and collection of VAT in respect of small undertakings, advantage was not taken of this facility in the United Kingdom until the enactment of section 26B of the Value Added Tax Act 1994. That section was inserted by section 23 of the Finance Act 2002 and was deemed to have come into force on 24 April 2002.
8. Section 26B(1) provides that:

"The Commissioners may by regulations make provision under which, where a taxable person so elects, the amount of his liability to VAT in respect of his relevant supplies in any prescribed accounting period shall be the appropriate percentage of his relevant turnover for that period."

9. Subsection (2) then defines the expressions "relevant supplies", "appropriate percentage" and "relevant turnover". For present purposes the details of those definitions do not matter, and they are anyway fleshed out in the relevant regulations.
10. I should also refer to subsection (4) which says:

"The regulations may provide for persons to be eligible to participate in the flat-rate scheme only in such cases and subject to such conditions and exceptions as may be specified in, or determined by or under, the regulations."

11. Subsection (5) then provides that, subject to such exceptions as the regulations may provide for, a participant in the Flat-Rate Scheme shall not be entitled to credit for input tax.
12. The remainder of section 26B makes various provisions relating to the regulations, and subsection (8) expressly authorises the inclusion in the regulations of a power enabling the Commissioners:

"(a) to authorise a person to participate in the flat-rate scheme with effect from--

(i) a day before the date of his election to participate, or

(ii) a day that is not earlier than that date but is before the date of the authorisation;

(b) to direct that a person shall cease to be a participant in the scheme with effect from a day before the date of the direction.

The day mentioned in paragraph (a)(i) above may be a day before the date on which the regulations come into force."

13. I now turn to the relevant regulations, which are contained in Part VIIA of the VAT Regulations 1995. I need refer to only two of them, regulations 55L and 55B.
14. Regulation 55L sets out the detailed conditions of eligibility to participate in the scheme. In short, a taxable person is eligible to be authorised to account for VAT in accordance with the scheme if two conditions are satisfied. First, there must be reasonable grounds for believing that the value of taxable supplies to be made by him in the period of one year then beginning will not exceed £150,000, and the total value of his income in the period of one year then beginning will not exceed £187,500. Secondly, he must satisfy a series of negative requirements that are then set out, including, for example, that he is not a tour operator and that he has not, in the period of one year preceding the relevant date, been convicted of any offence in connection with VAT or been guilty of infringements of various other compliance obligations.
15. Regulation 55B is important for the present case and I should quote it in full:

"55B(1) The Commissioners may, subject to the requirements of this Part, authorise a taxable person to account for and pay VAT in respect of his relevant supplies in accordance with the scheme with effect from:

(a) the beginning of his next prescribed accounting period after the date on which the Commissioners are notified of his desire to be so authorised, or

(b) such earlier or later date as may be agreed between him and the Commissioners.

(2) The date with effect from which a person is so authorised shall be known as his start date.

(3) The Commissioners may refuse to so authorise a person if they consider it is necessary for the protection of the revenue that he is not so authorised.

(4) A flat-rate trader shall continue to account for VAT in accordance with the scheme until his end date."

16. The end date, as one would expect, is the date on which the trader withdraws from the scheme in accordance with detailed provisions set out in regulation 55Q.
17. In March 2007, HMRC issued VAT Notice 733 replacing an earlier notice which had been issued in February 2004. Notice 733 deals with the Flat-Rate Scheme and, among other things, specifies the relevant percentages for different trade sectors. The percentage for entertainment or journalism is 11 per cent, and that is the figure which would apply to Mr Burke who is a journalist by profession.
18. Paragraph 5.5 is headed: "When can I start to use the scheme?" and reads as follows:

"We will notify you in writing if your application is successful. The letter will tell you the date you can start to use the scheme. This will normally be from the start of the VAT period following receipt of your application. Earlier or later start dates can be agreed.

When considering an earlier or later start date, we will consider all the facts including the timing of your application and your compliance record. We will not normally allow you to go back and use the scheme for periods for which you have already calculated your VAT liability."

19. The important points to note in this, in my judgment, are, first, that consideration will be given to all the facts in dealing with an application for an earlier start date and, secondly, that retrospection will not normally be allowed for periods for which liability has already been calculated on the normal, or indeed any other, basis. It is implicit in this that special circumstances would have to be shown in order to displace the normal policy set out in the notice.
20. By virtue of section 83(fza) of the 1994 Act, an appeal lies to a tribunal against a decision of the Commissioners refusing authority for a person to participate in the Flat-Rate Scheme. However, section 84(4ZA) provides that where an appeal is brought against such a decision:

"the tribunal shall not allow the appeal unless it considers that the Commissioners could not reasonably have been satisfied that there were grounds for the decision."

21. This provision imposes a high threshold and confines the jurisdiction of the tribunal to allow the appeal to cases where it considers that the Commissioners could not reasonably have been satisfied that there were grounds for the decision under appeal. In other words, although the jurisdiction is an appellate one, its content is, in essence, a supervisory one and it differs little, if at all, from the grounds upon which judicial review might otherwise be available in the absence of an express right of appeal. Compare John Dee Ltd v Customs and Excise Commissioners [1995] STC 941 at 950 d-e per Neill LJ with whom Roch LJ and Hutchison LJ agreed.

The Facts

22. The facts found by the Tribunal are set out in paragraphs 4 to 6 of the decision as follows:

"We found the following facts. The Appellant is a journalist who started in business and was registered for VAT from 1 April 1989. He had been completing his VAT returns on a quarterly basis in a satisfactory manner. In April 2002 the Scheme was introduced. The Scheme would have allowed the Appellant to calculate his VAT liability by taking 11% of his gross turnover. It would have eliminated the need for a record of his expenses from which he could reclaim the VAT, and would have simplified his accounting system.

Mr Bird told us that the Respondents had taking the following action to advertise the Scheme:

A leaflet would have been sent to the Appellant with his return for the periods falling between December 2002 and May 2003 headed "VAT returns without the headache". A flashing banner advertisement was placed on HMRC website at the time of the introduction of the Scheme. The Appellant told us that he did not complete his returns on the internet at that time.

A revised version of the leaflet accompanied the returns between June 2003 and August 2003.

A leaflet headed "Simplifying VAT for Small Businesses - Flat-Rate Scheme" was enclosed with VAT returns between December 2003 and June 2004. Included in the notes sent out to all traders with their VAT returns were the introduction of Scheme, a reference to the Scheme in December 2003, and a change to the Scheme in January 2004.

The Respondents' business support team frequently raised and discussed the Scheme during the course of routine telephone conversations.

The Appellant very readily confirmed to the Tribunal that he had seen the brochures referred to. He believed that he was at fault but still maintained that he had been treated unfairly. He was clearly anxious to assure the Tribunal of his honesty, and on the evidence before us there was no reason to doubt his honesty. Under questioning from the Chairman, he agreed that he count not be sure he had seen the leaflets let alone read them but he thought, as a conscientious businessman, he perhaps should have. If he had read them he would have made the application he subsequently submitted sooner.

On 18 October 2004 the Appellant was visited by Lisa Wyn Jones from Customs and Excise who inspected his books. He had been told that he was not entitled to claim all his telephone expenses for VAT purpose. Apart from that Ms Jones made no further comments as to his VAT returns and she did not advise him of the Scheme.

On 28 December 2007 the Appellant contacted the Respondents' National Contact Centre ("NCC"), to enquire about the Scheme. Notice 733 was forwarded to him. The Appellant contacted the NCC twice more in January 2008, resulting in his receiving form VAT 662 (the notification of a voluntary disclosure) and he was advised that the Scheme had started in April 2002. On 13 February 2008 the Appellant wrote to the Respondents to say that, at the time of inspection, he ought to have been told by Ms Jones that he was entitled to use the Scheme. As a result of his enquiries and subsequent telephone conversations with the Respondents he sent in a breakdown of his figures for the period 31 December 2002 to 31 December 2007 and requested a refund of £20,348. Mr Bird accepted that the figure was agreed by the Respondents. Further correspondence passed between the parities and the Appellant supplied accounts for the periods in question showing his net profit. On 8 April 2008 Yvonne Kilford, from the National Registrations Appeals Team, wrote to the Appellant refusing to allow the scheme to operate retrospectively. She indicated that the Scheme had been extensively advertised and that it was the Appellant's responsibility to make himself aware of the information that might be relevant to his business. It would be impossible for visiting officers to cover every aspect of VAT during a visit and furthermore, it is not their remit to offer tax planning advice. As a result she did not consider that the lack of awareness of the Scheme to be an "exceptional circumstance" in order to allow retrospective entry into the Scheme. As the Appellant had referred to the case of Alexander and Christine Wadlewski 13340 she stated that the tribunal had allowed retrospection in that case because the difference in liability amounted to 40% profits. The tribunal had concluded…. "It was unreasonable for the Commissioners not to consider whether a very high proportion of "over-payment" might not be exceptional circumstances justifying their discretion beyond the criteria they had laid down". She considered that as the difference in the VAT payments in the Appellant's business was less than 9% of his total turnover for the entire period there were no exceptional circumstances within terms of Alexander and Christine Wadlewski 13340. Further, the tribunal has consistently upheld the principle that, where a business operates a Retail Scheme according to the published rules (or an agreed version), the tax that is due under the scheme is the correct tax for the period. The fact that a different scheme produces a different or lower valuation is not itself an exceptional circumstance. An agreed witness statement by Yvonne Kilford was produced to the tribunal confirming contents of her letter."

23. The final decision letter sent by Ms Kilford on 8 April 2008 was, in fact, the third in a series which began on 11 February 2008, and it followed one or more reconsiderations by HMRC of their initial refusal to allow Mr Burke to enter the scheme with effect from April 2002.
24. In the first letter, dated 11 February, the officer who wrote it, Ms Rebecca Nally, set out HMRC's reasons for refusing Mr Burke's request as follows:

"It is the policy of HMRC to refuse retrospection where the business has already calculated its VAT liability using normal accounting, the grounds being 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. Where a trader has already calculated their VAT liability using normal accounting, retrospective use of the Flat-Rate Scheme would be authorised only where justified by exceptional circumstances. The fact that the trader may have accounted for less VAT had it applied for, and received, authorisation to use the Flat-Rate Scheme at some point prior in time is not in itself exceptional circumstances."

25. I comment that this appears to me to be an entirely rational policy, which reflects the simplification policy of the Flat-Rate Scheme itself. 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. In such cases, the only likely motive for seeking retrospective entry is that the taxpayer would, in fact, have ended up paying less tax had he been a member of the scheme, and that is indeed the position so far as Mr Burke is concerned. He calculated, and the Revenue do not dispute the figure, that he would have paid in total some £20,348 less from 2002 onwards had he been a member of the scheme from April of that year.
26. The second decision letter, dated 13 March 2008, was written by Ms Debra Hodson. She referred to internal guidance in the Revenue manuals and, in particular, to section FRS 3300 of the Flat-Rate Scheme guidance.
27. I was informed by Mr Bird that this guidance had recently been reissued with effect from 11 January 2008, in a form which replaced previous guidance. In her letter, Ms Hodson quoted two extracts from the new guidance. One extract read as follows:

"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."

28. I pause to note that this passage was, of course, reflected in the earlier letter which Ms Nally had written on 11 February. The second extract read:

"In line with the rationale of the scheme, the fact that the business will pay, or would have paid, less tax, is not sufficient reason to authorise retrospective use of the FRS."

29. She went on to refer to the wide publicity which had been given to the introduction of the scheme, and continued:

"The fact that you were not aware of the Flat-Rate Scheme until the end of 2007 does not constitute an exceptional circumstance justifying retrospection. I cannot comment on your 2004 VAT visit, you need to contact your local Compliance office regarding this."

30. She then pointed out that any request for repayment of VAT would, in any event, be subject to the three year cap contained in the legislation.
31. The final letter of 8 April 2008 was sent, as the Tribunal record, after Mr Burke had submitted details of his turnover and net profits for the years back to 2002, from which it was apparent that the VAT which he would have saved amounted to rather less than 9 per cent of his total turnover for the period. As the Tribunal also note, Ms Kilford referred in her letter to the compliance visit which had been paid to him in October 2004 and said:

"It would be impossible for visiting officers to cover every aspect of VAT during a visit and furthermore, it is not their remit to offer tax planning advice."

The decision of the Tribunal

32. After setting out the facts, the relevant law and the submissions of the parties, the Tribunal stated their conclusion in the first sentence of paragraph 13 of the decision as follows:

"We have considered all the facts and the law and have decided that Yvonne Kilford acted unreasonably in not allowing the Appellant to be backdated to the Scheme retrospectively to a date 3 years from the period 10/07 the last period under which VAT had been paid using the normal system."

33. They then referred to the decision of the Tribunal in the case of CJ Anderson, and cited from paragraphs 16 and 17 of that decision in which the Tribunal had referred to earlier internal guidance relating to the Flat-Rate Scheme contained in chapter 6 of the VAT Manual. This guidance contained statements that the Flat-Rate Scheme should be encouraged, and that the discretion to agree an earlier start date:

"should normally be exercised in the applicant's favour to encourage take-up of the scheme."

34. I comment that although this guidance was in force at the time of the October 2004 visit to Mr Burke, it had been superseded (as I have already explained) by the new internal guidance which was issued in January 2008 and which was in force when HMRC refused Mr Burke's application.
35. The Tribunal then purportedly referred to an extract from VAT Notice 733 referring to exceptional circumstances. In fact, the passage in question does not form part of Notice 733, nor is there any counterpart to it in Notice 733. The passage comes instead from internal guidance relating to retail schemes. The only connection with the Flat-Rate Scheme is that the internal guidance in force before January 2008 contained a cross reference to the retail scheme guidance and suggested that users might find it helpful. As I understand it, there was never any internal requirement for HMRC staff to apply the definition of exceptional circumstances in the retail scheme guidance in the different context of the Flat-Rate Scheme.
36. That said, the passage quoted by the Tribunal referred to one clear example of exceptional circumstances as being:

"where the business has been misdirected by (omission or commission) by an officer of HMRC."

37. The Tribunal continued as follows in paragraphs 14 and 15 of the decision:

"We accept that the Scheme is not designed to help those businesses, which complete their VAT returns on the usual basis and then discover, if they had asked for the Scheme to be applied, that they would obtain a substantial repayment. We accept that there must be exceptional circumstances and we were surprised when Mr Bird advised that as far as he was aware there had not been any exceptional circumstances applied by the Respondents in Flat-Rate scheme cases.

We suspect that many businessmen do not read the various leaflets which are sent to them with their returns. We believe that the Appellant will have received the leaflets but he will not have read them. It is for that reason that we cannot agree that the Scheme should be backdated to the date of its introduction. We note, however, that when he eventually applied for the Scheme he was readily accepted and we are certain that if he had applied in October 2004 he would have similarly been accepted.

There is clear expectation from the VAT Guidance that the Scheme should be promoted. Paragraph 5.5 Notice 733 identifies as an exceptional circumstance where the business has been misdirected by (omission or commission) by an officer of HMRC. In our view this must include the failure by Ms Jones to alert the Appellant to the benefits of the Scheme. We have therefore decided that Yvonne Kilford acted unreasonably in not backdating the application to the period which is 3 years from the period 10/7."

38. It will be seen that the basis of the Tribunal's decision, as finally articulated in paragraph 15, was the failure of Ms Jones to alert Mr Burke during her visit in October 2004 to the benefits and existence of the scheme.

Submissions on the appeal

39. Mr Bird's principal submission is that the decision taken by HMRC to refuse Mr Burke backdated entry into the scheme took account of all relevant matters and did not take account of any irrelevant matters. In particular, he submits that the Tribunal attributed too much weight to the failure of Ms Jones to draw the existence of the scheme to Mr Burke's attention in October 2004, and wrongly classed such a failure as a misdirection.
40. He stresses that Mr Burke had notice of the scheme in the various ways set out in the decision, and submits that it is irrelevant that he did not take the time or trouble to read the material which had been sent to him. He submits that Mr Burke must nevertheless be taken to have had knowledge of the scheme, and refers, albeit in a very different context, to the comments on knowledge made by Millett J, as he then was, in Agip (Africa) Limited v Jackson [1990] Ch 265 at 293.
41. Mr Bird goes on to submit that, in any event, there was no misdirection even if, which he submits is not the case, that was a relevant consideration. As he points out, misdirection is defined in the Revenue manual volume 1, section 90, paragraph 90.3, where it is said that a misdirection may be positive or by omission, and that the latter type of misdirection covers:

"circumstances where the Department has effectively misled a trader by failing to take action, or to give clear guidance on a matter where it could reasonably be expected we would take appropriate action."

42. He submits that a mere failure to draw the attention of a trader to the Flat-Rate Scheme cannot, without more, amount to a misdirection, because the concept requires "effective misleading". He says that the point is all the clearer where, as in the present case, the trader in question has already been notified of the availability of the scheme.
43. He goes on to submit that, in any event, the effect of a misdirection, assuming that one was made, is not a matter for the Tribunal, but is rather a matter for the Revenue Adjudicator within the scope of the relevant complaints procedure. The jurisdiction of the Tribunal to determine appeals is a purely statutory one.

Conclusions

44. I begin by reminding myself of the very limited scope of the appeal to the Tribunal. As they correctly recognised, they could allow Mr Burke's appeal only if they considered that the Commissioners could not reasonably have been satisfied that there were grounds for the decision to refuse Mr Burke's application for retrospective entry into the scheme. The duty of the Tribunal was to review by reference to that test the decision which was actually taken and which was finally confirmed in the letter of 8 April 2008. It was not their function, and they had no jurisdiction, to substitute their own assessment of the relevant facts for HMRC's.
45. Approaching the matter in that way, I can see no basis for interfering with the decision which HMRC took. The correspondence shows that Mr Burke was given every opportunity to advance the facts and arguments upon which he wished to rely, and the question was carefully considered on at least three occasions by different officers of HMRC. I can find no indication that they made any error of law, or that they took into account matters which they ought not to have taken into account, or vice versa.
46. The decision appears to me to fall comfortably within the wide discretion given to HMRC by section 26B(8) of the 1994 Act and regulation 55B of the 1995 regulations. The decision reflects the normal policy published in VAT Notice 733, and the internal guidance in sections FRS 3200 and 3300 of the VAT manual, which was the guidance in force at the time when the three decision letters were sent.
47. It is clear from the decision letters that consideration was given to the October 2004 visit upon which the Tribunal placed such reliance. I can see nothing unreasonable in the view expressed in the letter of 8 April to the effect that it would be impossible for visiting officers to cover every aspect of VAT during a visit, and it was, in any event, not their function to offer tax planning advice.
48. The most than can be said, in my judgment, is that, in the light of the internal guidance which was in force in October 2004, it would have accorded with current Revenue internal policy if Ms Jones had raised the question of the Flat-Rate Scheme with Mr Burke and suggested that he might consider applying to join it. But that is not to say that she was under any duty to raise the question, and in my view she plainly was not. Indeed, she might well have assumed that it was unnecessary for her to mention the scheme given the extensive publicity which it had already received.
49. In the absence of any duty to raise the matter, it cannot in my judgment possibly be said that there was any misdirection by omission as a result of her visit. The fact is that Mr Burke had already had several opportunities to find out about the scheme, and in my view HMRC cannot be blamed for his failure to take advantage of them.
50. My conclusion that there was no misdirection eliminates the one matter identified by the Tribunal in paragraph 15 of the decision as an exceptional circumstance which should have led HMRC to allow Mr Burke to join the scheme from an earlier date. It follows, in my judgment, that there was no material which could properly have led the Tribunal to conclude that the high threshold condition for a successful appeal was satisfied, and in those circumstances they erred in law in allowing the appeal.
51. This conclusion makes it unnecessary for me to consider Mr Bird's alternative submission that, even if the Tribunal were right to allow the appeal, they were nevertheless wrong to substitute their own view of what HMRC ought to have done in response to Mr Burke's application. It is enough to say that I see considerable force in the submission, but as it is unnecessary for me to rule on it I prefer not to do so.
52. For the reasons I have given, this appeal will be allowed.