[2010] UKFTT 228 (TC)

TC00529

	Appeal number:TC/2009/13271 

VAT – Flat Rate Scheme – application for retrospective entry into scheme – whether HMRC decision to refuse backdating reasonable

FIRST-TIER TRIBUNAL

TAX 

	S D SOLUTIONS LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (VAT)	Respondents

		TRIBUNAL: 	JUDGE ROGER BERNER									

Sitting in chambers at 45 Bedford Square, London WC1 on 13 May 2010

Determined without a hearing pursuant to rule 29(1) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009

© CROWN COPYRIGHT 2010

DECISION

1.	S D Solutions Limited (“the Appellant”) appeals against the refusal by HMRC to allow retrospective use by the Appellant of the Flat Rate Scheme (“FRS”) with effect from its VAT registration date of 1 July 2005.
2.	With the consent of the parties, the Tribunal directed that this matter be decided without a hearing pursuant to rule 29(1) of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.  The Tribunal received, and I have considered, written representations from both parties.
The facts
3.	The facts are straightforward, and largely uncontentious.  There is one particular issue between the parties, to which I refer below, but otherwise I have taken the background facts from those set out in HMRC’s statement of case.
(1)	The Appellant is a limited liability company whose main business activity is the provision of project management services carried on from premises at [redacted].
(2)	In June 2005 the Appellant applied for VAT registration online and was registered with effect from 1 July 2005 on a compulsory basis as the Appellant’s turnover had exceeded the £60,000 VAT registration threshold in force at that time.
(3)	HMRC say that on 18 October 2005, Laura Sharpe, the director of the Appellant company, telephoned HMRC’s National Advice Service and requested, amongst other publications, a copy of Public Notice 733, Flat Rate Scheme for Small Businesses, and that the publication was issued on the same day.  The fact of a telephone call is supported by a record of the enquiry which is dated 18 October 2005 and timed at 10.04.58.  It records the Appellant (not any individual) as the enquirer, and the enquiry type as “Leaflet/Form Request”.  It lists the publications requested, which include the FRS notice.  The Appellant says that Ms Sharpe did not make this call.  It is said that all tax (including VAT) matters were entrusted to Ms Sharpe’s father and that Ms Sharpe would not herself have contacted the National Advice Service direct.  Furthermore, the Appellant says that Ms Sharpe would have passed any published material received to her father without herself reading it.
(4)	The enquiry form does not state the identity of the individual who telephoned HMRC on 18 October 2005.  From the evidence before me I conclude that someone made that telephone call on behalf of the Appellant, and that Public Notice 733 was sent to the Appellant by HMRC on 18 October 2005.
(5)	On 1 June 2009 Mr James Brown, an employee of the appellant called HMRC’s National Advice Service to enquire whether applications for the FRS could be backdated.  He was advised that this was not normal, but that he could apply in accordance with Public Notice 733.  The Appellant does not dispute that such a call took place, but says that this was made on 25 May 2009, and not 1 June 2009.  Nothing turns on the date of this call, and so I make no finding in this regard.
(6)	On 1 June 2009 HMRC received the Appellant’s application to join the FRS dated 30 May 2009.  The application requested a start date of 1 July 2005 for the following reason:
“Please register from 1 July 2005 as we have never exceeded the turnover test since our VAT registration – nor will we now – despite previous optimism.  We were advised by your stand representative at Herts Business advice day on 7 May that retrospective action was ok.”
(7)	On 10 June 2009 Rebecca Nally of HMRC’s Grimsby Registration Unit wrote to the Appellant confirming authorisation to use the FRS with effect from 1 April 2009.  She explained that the Appellant’s request to backdate the FRS had been refused as VAT returns had already been rendered covering the period 1 July 2005 to 31 March 2009.  Ms Nally cited HMRC’s FRS guidance FRS3300 in support of her decision 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.”
“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 to authorise retrospective use of the FRS.”
(8)	FRS3300 also contains the following statement regarding “exceptional circumstances”:
“The proper exercise of the power to allow retrospection means that we should be prepared to recognise there may be exceptional circumstances when the policy [that is the policy described in the first of the two extracts from FRS3300 described by Ms Nally] should be set aside.  In principle, such cases are likely to involve compassionate circumstances, or the survival of the business, but we have not identified to date any case where such circumstances justify a departure from the normal policy.”
(9)	A letter confirming the Appellant’s right to use the FRS with effect from 1 April 2009 was issued by HMRC on 11 June 2009.
(10)	On 9 July 2009 the Appellant wrote to the Respondents requesting a review of the decision.  The letter informed HMRC that the Appellant company had ceased to trade.  In support of a claim that there were exceptional circumstances in the Appellant’s case, the Appellant said:
“We have ceased to trade because of our inability to secure further contracts or resurrect suspended works and as a consequence we will owe VAT to HMRC in our winding up whereas retrospective permission would allow us to eliminate that debt making more funds available to other preferential debts.”
(11)	A review was undertaken and on 20 July 2009 Lorraine Green of HMRC’s Registration Unit wrote to the Appellant upholding the original decision.  After referring to the same passages from FRS3300 as the letter of 10 June 2009, she stated that, having reviewed the Appellant’s individual circumstances and reasons for requesting retrospection, she did not consider any of them to be exceptional.
(12)	On 16 August 2009 the Appellant appealed to the Tribunal.
The law
4.	Section 26B of the Value Added Tax Act 1994 (“VATA”) provides the legislative authority for the FRS.  It allows a trader eligible to use the scheme, one who, broadly, has a limited turnover, to account for VAT by paying a prescribed percentage of his turnover.  Generally speaking the trader ceases to be eligible for credit for the input tax he has incurred.  It is thus a simplified system of accounting for VAT.
5.	Regulations 55A to 55V of the Value added Tax Regulations 1995 provide for the detail of the scheme.  Regulation 55B(1) provides:
“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.”
Regulation 55B(1) accordingly allows HMRC to exercise a discretion to backdate entry into the FRS to such date as may be agreed with the taxpayer.
The Appellant’s grounds of appeal
6.	The Appellant’s grounds of appeal set out in its notice of appeal dated 16 August 2009 were as follows:
“1. The Flat Rate Scheme for VAT would have been applied for earlier if it had been known that the company would not continue beyond March 2009.
2. The amount of VAT liability reduction if retrospective calculation were permitted would eliminate any debt due to HMRC for VAT at the cessation of business which exceeds £6000 at present.
3. Exceptional circumstances exist both in the amount of debt reduction achieved by retrospective flat rate scheme and because the company has ceased to trade.”
The Appellant’s arguments
7.	The Appellant says that it was unaware that the FRS was available to it, either through HMRC or Ms Sharpe’s father, until advice was received by an employee of the Appellant, Mr James Brown, at the Herts Advice Day on 7 May 2009.  The Appellant says that Mr Brown was encouraged by an HMRC stand representative to apply for FRS retrospectively.  The Appellant submits that this was the first the Appellant knew of the availability of FRS to a business in its position, on the basis that its turnover was always just short of exceeding the FRS limit.  Once positive advice had been received there was no delay in making the application for retrospective application of the FRS.
8.	On the question of fact as to whether the Appellant had been aware of its right to apply for FRS, we have found that Notice 733 was sent by HMRC to the Appellant on 18 October 2005.  It appears that the Appellant’s director did not read that notice, but the information contained in it, which would have informed the Appellant of its position as regards the application of the FRS, was available to it from October 2005.
9.	The Appellant points to the fact that it had ceased to trade prior to the review decision of 20 July 2009.  It owes £5,271.24 in VAT to HMRC for the two quarters ended 31 March 2009 which it says would be eliminated by the application of FRS retrospectively, as this would entitle the Appellant to a refund of £6,757.23.  Any surplus, it says, would be applied to outstanding PAYE/NIC debt in the winding up of the Appellant.  It is argued that this is an exceptional circumstance justifying approval for the backdating of the start date of the FRS.  It is “exceptional” because a cessation of business and a winding up can happen only once.  It is also said that the application of the refundable amount to VAT and other tax debts would represent an exceptional circumstance.  Finally, although this was not something of which HMRC had been made aware at the time of their original decision or the review, the Appellant refers to the illness of Ms Sharpe which, it is said, played a major part in the Appellant company ceasing to trade.
10.	The Appellant referred to similarities between its own case and the tribunal’s decision in C J Anderson v Revenue and Customs Commissioners (VAT decision no 2055; 28 June 2007).  I shall look at this decision in a little more detail below, but the parallels sought to be drawn by the Appellant with the Anderson case are as follows:
(1)	The Appellant’s director, Ms Sharpe, and consequently the Appellant itself, relied entirely upon Ms Sharpe’s father to look after the Appellant’s VAT affairs until May/June 2009.
(2)	The Appellant had an unblemished VAT compliance record until the company began to fail in late 2008.
(3)	The misinformation/wrong belief that the company turnover would preclude FRS persisted until May 2009.
(4)	There was no “wait and see” approach for VAT liability advantages.
(5)	The potential savings of over £6,000 in VAT and other indebtedness to HMRC are significant in the winding up of the company.
HMRC’s arguments
11.	HMRC’s arguments may be summarised as follows:
(1)	Regulation 55B(1) allows HMRC to backdate entry into the FRS to such a date as may be agreed with the taxpayer.
(2)	The purpose of the FRS is not to reduce the tax due but to reduce the administrative burden placed on small businesses when preparing VAT accounts.
(3)	A trader may therefore pay more or less tax when using the FRS compared to using the normal accounting methods.
(4)	Retrospective entry into the scheme cannot simplify a process that has already been undertaken.
(5)	The fact that a business will pay, or would have paid, less tax is not sufficient reason to authorise retrospective use of the FRS.
(6)	As the Appellant’s VAT returns had been rendered for the periods for which retrospective FRS was sought, there is no administrative benefit to the Appellant to re-create accounts under a different system.
(7)	The fact that the Appellant company has ceased to trade cannot be considered an exceptional circumstance under which to allow retrospective use of the FRS.
(8)	In reaching their decision HMRC have taken into consideration all relevant matters and have not taken into consideration irrelevant matters.  As such, HMRC’s decision is reasonable.
Discussion
12.	The power of the Tribunal on an appeal of this nature is set out in section 84(4ZA) VATA.  This 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 [their] decision.”  I can consider only the reasonableness of HMRC’s decision and cannot substitute my own judgement for that of HMRC.  In looking at the reasonableness of the decision, I must consider whether HMRC acted in a way in which no reasonable panel of commissioners could have acted, and whether HMRC took into account all relevant matters to which they should have given weight and, on the other hand, did not take into account any irrelevant matters (see John Dee Ltd v Customs and Excise Commissioners [1995] STC 221).
13.	In this case there were two decisions, the first on 10 June 2009, based on the Appellant’s application of 30 May 2009, and the second on a review following the Appellant’s letter of 9 July 2009 in which the Appellant referred to the fact that it had ceased to trade.  In both cases HMRC referred to the guidance as to its policy set out in FRS3300, to which I have referred above.
14.	This policy, expressed in very similar if not identical terms, was considered in the High Court by Henderson J in Revenue and Customs Commissioners v David Burke [2009] EWHC 2587 (Ch).  The learned judge commented as follows (at [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…”
This of course, on the Appellant’s case, is precisely the position of the Appellant.
15.	I can allow this appeal only if I consider that HMRC could not reasonably have been satisfied that there were grounds for their decision to refuse the Appellant’s application for retrospective entry into the FRS.  I can see no basis for reaching such a conclusion.  The reasons given by HMRC for refusing backdating, and for upholding that decision on review, were entirely reasonable in the context of the FRS, and it is clear that both decisions took into account all relevant matters of which HMRC had notice at the relevant times, and did not take into account anything irrelevant.
16.	HMRC took into account the fact that the Appellant’s business had closed down.  This had been drawn to HMRC’s attention after the original decision in June 2009, but before the review decision in July 2009.  HMRC decided that this was not an exceptional circumstance.  I find that this was a perfectly reasonable conclusion.  The guidance in FRS3300 in relation to exceptional circumstances refers to the survival of the business.  That is not relevant to a case where a business has already ceased.  The illness of Ms Sharpe that is said to have contributed to the demise of the business was not drawn to HMRC’s attention at the time they were making their decisions, and so was not a factor they could reasonably have taken into account; but in any event that would not in my view have altered the position.
17.	Nor is it unreasonable for HMRC not to have allowed retrospection on the ground that a VAT debt could thereby be eliminated and more funds would then become available to other preferential creditors.  That is a consequence of the business paying less tax, and has nothing to do with the simplification of VAT accounting and record-keeping.
C J Anderson
18.	As the Appellant’s arguments relied heavily upon the tribunal decision in Anderson, I should say a few words in that respect.
19.	Anderson also concerned a refusal by HMRC to backdate the taxpayer’s application to join the FRS, in that case to the start date of the scheme.  The appellant in Anderson was an individual self-employed lorry driver.  Like the Appellant in this case, Mr Anderson had an unblemished VAT compliance record.  Mr Anderson’s father dealt with his son’s VAT affairs, and the evidence was that he was not aware of the FRS at its inception, and that as soon as he became aware of it he had contacted HMRC.  He then performed calculations to advise his son.  The tribunal held that this was not the same as a “wait and see” approach, which was described in terms of an accountant who was fully aware of the scheme but advising his client to wait and see if a tax advantage was realised at the year end before applying for retrospective use of the scheme.  It was also held that the potential savings of tax were a significant amount for Mr Anderson, particularly having regard to the profitability and the indebtedness of his business. 
20.	In Anderson the tribunal decided that the HMRC officer applied HMRC’s policy on backdating FRS applications without regard to the individual circumstances of Mr Anderson, and that in that respect HMRC’s decision in that case was unreasonable.  The tribunal then went on to consider, on the basis of John Dee, whether the decision would inevitably have been the same if the relevant circumstances had been taken into account.  It found that this would not have been a foregone conclusion.  Accordingly it allowed Mr Anderson’s appeal.
21.	The Anderson case is referred to in HMRC’s published guidance in FRS 3300.  There it is stated that in the light of the tribunal’s comments in that case that the refusal letter did not adequately set out the reasons for refusing retrospection, together with a lack of clarity about retrospection policy in previous versions of HMRC guidance, HMRC decided, exceptionally, to allow retrospection.
22.	Guidance applicable at the material time for the Anderson appeal reflected the inception of the scheme and contained statements that the FRS 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.”  This guidance was superseded by new internal guidance issued in January 2008.  This guidance, which was applicable at the relevant times in this appeal, included the statements I have quoted from FRS3300.
23.	In Anderson the tribunal considered that HMRC would give weight to the unblemished VAT compliance record of the applicant.  On the basis of the applicable guidance in this case this does not seem to me any longer to be a sound proposition.  Entry into the scheme at all is subject to the applicant not having been subject to certain penalties, but in terms of retrospection one corollary to the holding of an unblemished record will be that VAT will have been accounted for in respect of prior periods, and there will accordingly be no need for simplification in relation to those periods.  For the same reason, I do not consider that the tribunal’s apparent view that the tax advantage that the use of the scheme would produce might influence HMRC to decide in favour of the applicant could any longer be sustained.  Nor in my view can the fact that an applicant does not wait and see if his liability would be lower if the FRS had applied affect the decision if no administrative advantage can be obtained by retrospective entry into the scheme.
24.	The Appellant referred to the fact that it had relied upon Ms Sharpe’s father, in an attempt to draw a further parallel with Anderson.  The facts are rather different, but in any event the tribunal in Anderson thought that HMRC would disregard Mr Anderson’s reliance on his father.  It is the taxpayer’s responsibility to inform itself, by reference to published guidance, of the available special schemes for VAT.  In this case I have found that the Appellant had taken steps, shortly after becoming first registered for VAT, to obtain Notice 733, so it ought to have been aware of the position at a very early stage. 
25.	The Appellant seeks to draw heavily upon similarities between its case and that of Anderson.  Tribunal cases often depend on their own particular facts, and all the circumstances, including HMRC policy, pertaining at the relevant time.  Similarities in the factual position will not necessarily result in similar outcomes.  The comments in Anderson to which I have just referred were not directed to whether the exercise of HMRC’s discretion was reasonable or unreasonable; the tribunal had separately found that the decision had been unreasonable because it had not taken into account the individual circumstances of Mr Anderson.  In reviewing that decision, the tribunal was seeking to identify whether the decision would inevitably have been the same if it had been made reasonably, taking into account all relevant matters.  Here, as I have found, HMRC did take into account the Appellant’s individual circumstances.  In the light of HMRC’s “entirely rational” policy, and the published guidance that was extant at the material time, I have no doubt that in the case of the Appellant HMRC exercised its discretion reasonably.  Comparisons with Anderson cannot therefore assist the Appellant.
Decision
26.	For these reasons, I dismiss this appeal.

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.

ROGER BERNER

TRIBUNAL JUDGE
RELEASE DATE: 19 May 2010