[2012] UKFTT 287 (TC)
TC01975
Appeal number:
TC/2011/02971
TYPE OF TAX – VAT – appeal
against HMRC’s refusal to apply the Flat Rate Scheme retrospectively –the
appellant claimed that there were exceptional circumstances for the late
application- appeal dismissed- the purpose of the scheme was to simplify the
accounting for VAT by small businesses but three VAT returns had already been
submitted by the appellant before the application for admission to the scheme
was received
FIRST-TIER TRIBUNAL
TAX CHAMBER
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JMB WILMINGTON
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Appellant
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- and -
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THE
COMMISSIONERS FOR HER MAJESTY’S
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Respondents
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REVENUE &
CUSTOMS
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TRIBUNAL:
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JUDGE SANDY RADFORD
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Sitting in public at 45 Bedford Square, London on 6 January 2012
Mrs J Braisted for the Appellant
Mrs S Knibbs for the
Respondents
© CROWN COPYRIGHT
2012
DECISION
1.
This is an appeal against HMRC’s refusal to apply the VAT Flat Rate
Scheme (“FRS”) retrospectively.
2.
The appellant claimed that there were exceptional circumstances and it
should therefore have been allowed.
The Law
3.
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 UK until the
enactment of section 26B of the Value Added Tax Act 1994 (“VATA”). That section
was inserted by Section 23 of the Finance Act 2002.
4.
Section 26B of VATA states:
(1) 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.
A
person whose liability to VAT is to any extent determined as mentioned above is
referred to in this section as participating in the flat-rate scheme.
(2) For the purposes of this section—
(a) a person’s
“relevant supplies” are all supplies made by him except supplies made at such
times or of such descriptions as may be specified in the regulations;
(b) the “appropriate
percentage” is the percentage so specified for the category of business carried
on by the person in question;
(c) a person’s “relevant turnover” is the total of—
(i) the value
of those of his relevant supplies that are taxable supplies, together with the
VAT chargeable on them, and
(ii) the value of those of his relevant supplies that
are exempt supplies.
(4) 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.
(8) The regulations may make provision 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.
5.
Paragraph 55B(1) of Part VIIA of the VAT Regulations 1995 states:
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 in writing of his desire to be so authorised, or
(b)such earlier
or later date as may be agreed between him and the Commissioners.
6.
Section FRS3300 of HMRC’s FRS guidance states:
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.
7.
Section FRS3300 of the guidance also states:
In
line with the rationale of the scheme, the fact that a business will pay, or
would have paid, less tax, is not sufficient reason authorise retrospective use
of the FRS.
8.
HMRC’s guidance contained within FRS 3300 “Treatment of applications:
Considering requests for retrospective use of the FRS states:
“There may be exceptional circumstances where the
policy described in the previous bullet (refusal of retrospective entry into
the FRS where a business has already calculated its liability using an
alternative method).”
9.
By virtue of Section 83fza of VATA an appeal lies to a tribunal against
a decision of HMRC refusing authority for a person to participate in the FRS.
However Section 84(4ZA) of VATA 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.”
10.
In the case of HMRC v Burke [2009] EWHC 2587 Henderson J said:
“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 in force, there is no way in which
retrospective admission to the scheme can simplify the accounting exercise that
has already been carried out”.
Background and facts
11.
The appellant submitted a claim for admission to the FRS which although
dated 7 February 2010 was received by HMRC on 10 February 2011. The appellant requested a retrospective date and asked that the admission come into effect
from 1 March 2010.
12.
HMRC wrote to the appellant on 14 February 2011 confirming authorisation to use the scheme effective from 1 December 2010.
13.
HMRC confirmed that they were unable to meet the appellant’s request to
backdate the scheme to 1 March 2010. Where a trader has already calculated
their VAT liability using normal accounting, retrospective use of the scheme
would only be authorised where justified by exceptional circumstances.
14.
Mrs Braisted, a director of the appellant, gave evidence in support of
the appellant’s claim that there were exceptional circumstances.
15.
She said that after fifteen years as a head teacher she had decided to
set up a business to help failing schools by supporting them after an Ofsted inspection
and helping them to get on an even keel again. When her husband was made
redundant in 2004 he joined her business and was in charge of secretarial, word
processing and administration.
16.
They were recommended to an accountant in 2004 and he did what was
necessary including the tax and the payroll. They met once a year to go through
the books.
17.
At the AGM at the beginning of 2010 it was realised that the company
needed to be registered for VAT because it was over the threshold. In normal
circumstances she would have checked for herself how the VAT worked but by then
her husband was seriously ill.
18.
As a result she had to take on her husband’s duties as well as her own
and in addition both their mothers were in their nineties and needing care
because they wished to remain in their own homes.
19.
She therefore asked the accountant to register the company for VAT and
he duly submitted returns at the end of June and September 2010.
20.
Her husband was finally diagnosed with a kidney tumour which had to be
removed and while he was recovering she started to look at the VAT guidelines
herself. She went to a small business conference where the FRS was explained.
She talked to other school improvement partners and realised that for both
financial and administrative reasons the appellant would be better off in the
FRS.
21.
She phoned the accountant in September 2010 and asked him to apply for
the FRS for the appellant but after two months he still had not done so. As a
result of his attitude and the fact that he had no information on the FRS she
changed accountants in November 2010.
22.
The new accountants undertook the September – November VAT return in
December 2010 and additionally retrospective admission to the FRS was sought.
23.
Mrs Braisted admitted that she was not totally aware of how the VAT
liabilities were calculated and HMRC looked back over the relevant period. As a
result of the mixture of exempt and taxable supplies made by the appellant, HMRC
calculated that had the appellant registered for the FRS from the start the result
would have been a saving of some £1,400 of VAT which was a relatively small
amount when compared to the overall turnover of the appellant at the time.
24.
Mrs Braisted confirmed that in fact the appellant had deregistered for
VAT in April 2011 as she had subsequently had to curtail her work because her
husband had secondary tumours and was now terminal.
25.
On 23 February 2011 Mrs Braisted wrote to HMRC explaining her
circumstances and asking them to review their decision concerning the
appellant’s retrospective admission to the FRS. However on review HMRC
confirmed their decision and suggested that she refer the matter to a Tribunal.
The appellant’s Submissions
26.
Mrs Braisted submitted that during the period of her husband’s illness
they had been forced to rely heavily on the accountant and it was his
dilatoriness and failure to advise them correctly which had created the issue.
27.
She submitted that her husband’s illness had resulted in exceptional
circumstances which had ultimately caused the late application for admission to
the FRS. Had he not become so ill causing her to take on all his
responsibilities as well as her own, she would have investigated the VAT
herself.
28.
Mrs Braisted submitted that whilst she considered that HMRC had followed
their guidelines she felt that her own mitigating circumstances had not been
taken into account.
29.
She submitted that the appellant’s admission to the FRS should be
backdated to the start of its VAT registration and the appellant should receive
the associated refund of VAT. The previous accountant had calculated the March
to May 2010 and June to August 2010 VAT returns at the higher rate of VAT at
which point she had little awareness and trusted that the accountant had full
knowledge of the VAT system.
HMRC’s Submissions
30.
HMRC submitted that whilst they had every sympathy for Mrs Braisted’s
preoccupation with her husband’s tragic illness and all her other consequent
responsibilities, nevertheless it was in fact her reliance on the accountant
which she had appointed which had caused the problem. HMRC submitted that
reliance on a third person could not be seen as grounds for granting the
appellant’s request for retrospective admission to the FRS.
31.
Mrs Knibbs submitted that the purpose and benefit of the FRS was to make
administration easier for small companies. Using the FRS meant that the
completion of the VAT returns became a simple operation. However if the returns
had already been completed then there was no benefit to be gained by completing
them again other than a financial one and a financial gain was not a purpose of
the scheme.
32.
The accountant should have kept the appellant informed of its options
but even if the appellant was being represented by an accountant the onus was
on the appellant to make the final decisions and agree the submitted returns.
33.
HMRC submitted that as the 5/10, 8/10 and 11/10 returns had already been
submitted using the standard rate, allowing backdating of the FRS would
undermine the purpose of the FRS which was to simplify VAT accounting and
record keeping. The fact that a business will pay or would have paid less tax
was not a sufficient reason to authorise retrospective use of the FRS.
34.
The FRS could usually be used from the beginning of the next VAT period
for which the applicant had not completed a return and this principle was
applied to the appellant’s application.
35.
Two returns had already been submitted by the appellant thus complying
with its legal obligations and as these had already been submitted prior to
requesting admission to the FRS, retrospective admission would give the
appellant an unfair commercial advantage.
36.
HMRC submitted that as the returns had already been submitted there was
no administrative value in re-submitting using a different method.
37.
HMRC submitted that the very difficult circumstances described were not
exceptional enough to warrant conceding to the request given that a legal tax
declaration had already been made and reliance on a third party, the accountant,
was not grounds for permitting a retrospective admission to the FRS.
38.
HMRC submitted that FRS3300 specifically mentioned the survival of a
business as the type of circumstances which would allow retrospective admission
to the FRS.
Findings
39.
The Tribunal found that the FRS existed to simplify VAT accounting and
record keeping for small businesses, so that they were able to spend less time
on VAT. Accordingly because the appellant had already accounted for VAT for the
VAT periods in question using the normal basis, retrospective admission to the
FRS would be superfluous.
40.
The Tribunal had every sympathy with Mrs Braisted and the tragic
circumstances in which she found herself. However the Tribunal found that the
reason for the delay in requesting admission to the FRS was the apparent incompetence
or ignorance of the appellant’s previous accountant who had worked for the
company since 2004, and not Mrs Braisted’s circumstances.
41.
Although FRS 3300 mentioned that compassionate circumstances might count
as exceptional circumstances, it also stated that thus far no such
circumstances had been identified as justifying a departure from normal policy
and the Tribunal found that in this matter there were no exceptional
circumstances, the late application having been caused by the previous
accountant.
42.
The Tribunal also found that it appeared that the new accountants had
not submitted the application for admission to the FRS until late January or
early February 2011 as it was not received by HMRC until 10 February 2011.
43.
Despite Mrs Braisted’s belief that the appellant would have been better
off in the FRS from the start both for financial and administrative reasons, the
Tribunal found that had the retrospective admission been allowed there would no
longer have been an administrative advantage as the returns had already been
submitted and as a result of the exempt supplies made by the appellant, the
financial benefit was minimal.
44.
The Tribunal found that it appeared that the main reason for the
appellant wishing for retrospective admission to the FRS was a financial one
and a financial advantage was not an accepted reason for retrospective
admission to the FRS. As stated in the legislation, HMRC’s guidance and the
case of HMRC v Burke the purpose of the FRS is to simplify the VAT
accounting system for small businesses. As stated by Henderson J in the Burke
case “If a taxpayer has already accounted
for VAT in the past on the normal basis, and in accordance with the general law
in force, there is no way in which retrospective admission to the scheme can
simplify the accounting exercise that has already been carried out.”
45.
The Tribunal found therefore that the decision by HMRC to refuse the
appellant retrospective admission to the FRS was reasonable. Taking account of all
the relevant circumstances the Tribunal considered that HMRC was “reasonably
satisfied that there were grounds for their decision” (Section 84(4ZA) VATA).
Decision
46.
The appeal is dismissed.
47.
This document contains full findings of fact and reasons for the
decision. Any party dissatisfied with this decision has a right to apply for
permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure
(First-tier Tribunal) (Tax Chamber) Rules 2009. The application must be
received by this Tribunal not later than 56 days after this decision is sent to
that party. 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.
TRIBUNAL JUDGE
RELEASE DATE: 30 April 2012
