First-tier Tribunal (Tax)

[2010] UKFTT 40 (TC)

TC00354

Appeal number LON/08/1974

VALUE ADDED TAX – flat rate scheme – Appellant’s VAT liability greater under flat rate scheme than under standard VAT arrangements – application to withdraw retrospectively – application refused – reasonableness of HMRC decision – section 84(4ZA) VAT Act – appeal denied

FIRST-TIER TRIBUNAL

TAX

                                                  Brian Reynolds                                 Appellant

                                                                      - and -

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                             REVENUE AND CUSTOMS (VAT)         Respondents

                                                TRIBUNAL: Nicholas Aleksander (Tribunal Judge)

                                                                        Elizabeth Bridge

Sitting in public in London on 11 January 2010

The Appellant in person

Richard Smith instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1. This is an appeal against the decision of HM Revenue and Customs not to allow Mr Reynolds to withdraw from the flat rate VAT scheme from a date prior to the date of his withdrawal request.

2. Mr Reynolds represented himself before the tribunal, and Mr Smith represented HMRC.  We had before us a bundle of documents.  Mr |Price, an officer of HMRC gave evidence before us.

3. Mr Reynolds is a sole trader with a plumbing business.  At the time when he registered for VAT he also applied to account for VAT under the flat rate scheme.  Mr Reynolds was registered for VAT and approved for the flat rate scheme with effect from 1 December 2004.

4. Mr Reynolds got into difficulties with his compliance with VAT, and for a period did not file VAT returns, and paid VAT on assessments issued by HMRC centrally,  He was visited by Mr Price on 7 May 2008.  In anticipation of the visit, Mr Reynolds got his paperwork up-to-date, and with the assistance of Mr Price, completed his outstanding VAT returns.  In going through his VAT papers, Mr Reynolds ascertained that he was paying more VAT under the flat rate scheme than if he was accounting for VAT under the normal arrangements.  He therefore applied on 28 May 2008 to withdraw from the flat rate scheme with effect from 1 December 2004, so that he would be treated as if he never joined it.  The basis of the application was that Mr Reynolds was paying significantly more VAT as a result of accounting under the flat rate scheme than under the standard VAT arrangements.

5. Mr Price’s decision on the application to withdraw for the scheme is contained in his letter of 12 June 2008.  He allowed withdrawal from the date of the application (28 May 2008), but not retrospectively.  Mr Price stated that the fact that a business would pay less VAT if it withdrew from the scheme is not considered a sufficient reason to allow an early withdrawal.  It is this decision which is under appeal.

6. The jurisdiction of the tribunal in this case is governed by section 84(4ZA) Value Added Tax Act 1994.  This provides that we cannot allow the appeal unless we consider that HMRC could not reasonably have been satisfied that there were grounds for its decision.  In other words, we do not have jurisdiction to “re-make” HMRC’s decision.  Our role is solely to determine whether Mr Price in reaching his decision acted in a manner in which no reasonable HMRC officer would act.  Did he act capriciously?  In reaching his decision, did he ignore relevant factors, or take into account irrelevant factors?

7. In our view, Mr Price acted reasonably, and this appeal must therefore be dismissed.  HMRC’s policy is generally not to allow retrospective application or withdrawal from the flat rate scheme – and that retrospective applications should only be allowed in exceptional circumstances.  The mere fact that a taxpayer will pay more tax under the flat rate scheme is not considered exceptional for these purposes.  In our view this is a rational policy.  The flat rate scheme is intended to provide a measure of simplification for small businesses, and is intended to be revenue neutral. The objective of the scheme is not to provide a mechanism for small businesses to pay less VAT – and this is clear from the provisions of the VAT Directive which allow member states to implement simplified VAT accounting arrangements for small businesses.  The flat rate scheme is based on average rates of input VAT recovery for business sectors – and as it is based on averages, it is inevitable that some taxpayers will pay more (or less) than the average.  If taxpayers were allowed to join or withdraw from the scheme retrospectively, then this would defeat the simplification objectives of the scheme.  Taxpayers could “game” the system – and join the scheme on a “punt”, and after three years review their input VAT and apply to withdraw from the scheme with retrospective effect if they found they would pay less VAT as a result.

8. We appreciate that our decision will have the effect of Mr Reynolds paying more VAT than if he had never joined the flat rate scheme.  However this is an inherent risk in joining the flat rate scheme, as it is based on average rates of VAT recovery for the business sector.

9. The Appellant has a right to apply for permission to appeal against this decision.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this Decision Notice.

Nicholas Aleksander

TRIBUNAL JUDGE

RELEASE DATE: 21 January 2010

Cases referred to in skeleton arguments:
HMRC v Burke [2009] EWHC 2587 (Ch)
Dee v HMCE [1995] STC 941