[2013] UKFTT 335 (TC)
TC02738
Appeal number: TC/2012/05349
VAT – Flat Rate Scheme – Appeal
against HMRC refusal to allow retrospective application
FIRST-TIER TRIBUNAL
TAX CHAMBER
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GEOFFREY SEEFF
t/a TPL
ASSOCIATES
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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 CHRISTOPHER STAKER
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Caroline de Albuquerque
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Sitting in public at London on 17 May 2013
Mr L Bingham for the Appellant
The Appellant in person
© CROWN COPYRIGHT
2013
DECISION
Introduction
1.
The Appellant appeals against a decision of HMRC dated 12 February 2012,
affirmed on review on 4 April 2012, refusing the Appellant’s request dated 31
January 2012 to convert his VAT registration retrospectively to the flat-rate
scheme (“FRS”).
2.
At the end of the hearing of this appeal on 17 May 2012, the Tribunal
gave an oral determination allowing the appeal. Mr Bingham requested full
written reasons for the Tribunal’s decision, which are now provided.
The facts
3.
The background facts of the case have been set out by the Appellant in
his correspondence with HMRC in relation to his request for retrospective
application of the FRS, and in relation to his appeal against the HMRC decision
to refuse that request. HMRC have not sought to dispute the backgrounds
facts. On its consideration of the evidence, the Tribunal finds the following
facts to be established on a balance of probability.
4.
The Appellant is a Fellow of the Chartered Institute of Accountants in England and Wales and has a PhD from the University of Birmingham. He has practised for over 35
years as a management consultant. In 2007, he resigned from his then employer
to set up a management consultancy as an unincorporated sole practitioner. Based
on discussions with prospective clients and his previous experience, he
forecast that his turnover would exceed by a considerable margin the threshold
for registration for VAT, and he therefore registered for VAT with effect from
2 January 2007.
5.
At the time that he registered for VAT, he would have been entitled to apply
to use the FRS if his expected turnover was less than £150,000. The FRS is
provided for in s 26B of the Value Added Tax Act 1994 (“VATA”).
Under the FRS, VAT is calculated as a percentage of sales, without the need to
calculate input tax and the corresponding need to keep receipts for purchases.
Throughout the period of his VAT registration, the Appellant was aware of the
availability of the FRS, but he did not apply to use it as he thought that his
turnover would exceed the £150,000 threshold.
6.
Unfortunately for the Appellant, matters did not work out as he had
hoped, in part due to the general economic situation from 2008. His turnover
during his first year of registration was some £44,000. During the second year
of registration it was some £49,000. In the third year, it was some £36,000.
In the fourth year it was less than £1,000. In the fifth year it was some
£23,000. Thus, in fact, at no point did the turnover reach anywhere near the
threshold for VAT registration.
7.
Throughout the period of his VAT registration, the Appellant had
expectations that the situation would improve. Eventually, he came to accept
that there was no prospect of this happening. On 31 January 2012, he wrote to
HMRC, noting that he had never reached the threshold for mandatory VAT
registration, and requesting that he be deregistered with effect from 31
December 2011.
8.
That 31 January 2012 letter also requested that the period of his VAT
registration from 2 January 2007 to 31 December 2011 be converted
retrospectively to the FRS. In support of this request, the representations
made in the letter included the following:
(1)
At no time during the period of VAT registration had his turnover
reached the mandatory threshold for registration.
(2)
The Appellant’s management consultancy business was severely affected by
the financial crisis of 2008.
(3)
The failure to secure the expected turnover and the economic downturn
has caused immense financial difficulty to the Appellant personally.
(4)
The Appellant disadvantaged himself and exacerbated his financial
difficulties by not converting his registration to the FRS.
9.
These representations were expanded upon in subsequent correspondence
with HMRC. In a letter dated 7 March 2012, after the original HMRC decision
but before the review decision, the Appellant set out why he considered that
his case was exceptional. He said that throughout the period of his
registration, he expected an upturn, and therefore did not apply to deregister for
VAT or apply for the FRS. Then in early 2009 his income plummeted
catastrophically. By the time that he realised that the FRS would be
appropriate, it was too late to gain anything by making an application. He
stated that “the sudden and total disappearance of my business ... makes my
situation ... exceptional”.
10.
The Appellant’s total VAT liability for the whole period of his VAT
registration using the standard basis of accounting is £23,997. His total
liability under the FRS would be £21,846, a difference of £2,151.
Applicable law and guidance
11.
HMRC has the power under regulation 55B(1)(b) of the VAT Regulations
1995 to allow a retrospective start date for the FRS. In the present case,
HMRC has accepted that it had the power to grant the Appellant’s request to
have the whole of his period of VAT registration retrospectively placed under
the FRS, and that the Appellant qualified for the FRS for the whole of that
period.
12.
HMRC has guidance on how to deal with applications for the retrospective
application of the FRS. FRS3200 provides that the power to allow retrospective
applications is one that HMRC must “use reasonably in the circumstances of each
case”, that the decision maker must “consider all the relevant facts”, and must
explain the main reasons and indicate the main factors taken into account if
the decision is to refuse. FRS3300 lists factors to be taken into account by
the decision maker under four bullet points. The first bullet point states
again that “Each case should be considered on its own merits”. It states that
the fact that less tax would be paid under the FRS is not “sufficient” reason
to authorise use of the scheme retrospectively, but it does not state that this
is a wholly irrelevant consideration. The second bullet point states that
authorisation may be refused if this would present a revenue risk. HMRC have
not suggested that this is a consideration in the present case. The third
bullet point states that because the purpose of the FRS is to simplify VAT
accounting, “The policy is to refuse retrospection where the business has
already calculated its VAT liability ... using a different accounting method”,
subject to the fourth bullet point. The fourth bullet point states that there
may be “exceptional circumstances” where this policy should not apply, and that
such cases are “likely to involve compassionate circumstances, or the survival
of the business”. It is added that HMRC “have not identified to date any case
where such circumstances justify a departure from the normal policy”.
13.
Section 83(1)(fza) VATA provides for an appeal to the Tribunal against a
decision of HMRC refusing or withdrawing authorisation to use the FRS.
14.
Section 84(4ZA) VATA 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 the decision”. Mr Bingham accepted on behalf of HMRC that if the
Tribunal considered that HMRC could not reasonably have been satisfied that
there were grounds for the HMRC decision, the Tribunal could substitute its own
decision on the Appellant’s application for retrospective application of the FRS.
The HMRC decision
15.
The HMRC decision of 10 February 2012 referred to FRS3300, and said
simply that “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”.
16.
The Tribunal notes that this decision does not consider in terms whether
or not there are exceptional circumstances in the present case. In particular,
it does not address the representations made by the Appellant, and reach a
conclusion on whether these representations amount to exceptional
circumstances.
17.
The HMRC review decision of 4 April 2012 refers to the applicable
legislation and guidance. It then notes that under the guidance, “survival of
a business may be an exceptional circumstance”, but concludes that: “In
order for retrospective entry due to exceptional circumstances to apply there
would need to be firm evidence that a trader would be put out of business as a
direct result of a decision to refuse retrospection. In your case it appears
the business has already ceased to trade and retrospection cannot be allowed
simply to reduce any outstanding tax due”.
Arguments of the parties
18.
The Appellant’s grounds are set out in his notice of appeal, a reply to
the statement of case, and his oral submissions at the hearing. Various of his
points reflect his earlier correspondence with HMRC. His main grounds are as follows:
(1)
HMRC has not considered the points made the Appellant in his application
for retrospectivity.
(2)
The HMRC finding that “survival of the business” is not at stake because
he has ceased trading is wrong. He has not ceased trading (although he has
minimal turnover), but has merely deregistered for VAT.
(3)
HMRC have a duty to advise taxpayers of their options, in particular of
the availability of the FRS, where it is apparent from returns that it would
apply, or when a business is no longer required to be registered for VAT at all.
(4)
It is not equitable that two businesses with the same turnover trading
in the same circumstances could be liable to different amounts of tax, merely
as a consequence of their different expectations at a given point in time as to
what may happen in the future.
(5)
If a business registered for the FRS exceeded the threshold for the
scheme, HMRC would seek to claw back the additional tax liability. HMRC should
be required, conversely, to repay the additional VAT in cases where a business
did not register because it thought it would exceed the threshold, but then
ultimately did not.
(6)
Although HMRC state that the FRS was introduced to ease the
administrative burden placed on small traders, in fact it does not achieve this
purpose, and the scheme is perceived by the general business community as a tax
incentive for small businesses which is only ever used when it is financially
advantageous to the business.
(7)
The Appellant relied on Anderson v Revenue & Customs
[2007] UKVAT V20255 at [29]-[30] as an example of a case where the Tribunal
allowed an appeal where the HMRC decision “over-simplified the Appellant’s
case”.
(8)
The Appellant also relied on AC Wadlewski [LON
94/1849], quoted in Anderson at [20], for the proposition that the fact
that he would have paid less under the FRS is a relevant consideration.
19.
The HMRC position is, in essence, that the HMRC decision did consider
all of the circumstances relied upon by the Appellant, that the decision was in
accordance with HMRC policy, that the Appellant’s only reason for wanting
retrospective application of the FRS was that it would reduce his VAT
liability, that there were no exceptional circumstances, and that HMRC is under
no obligation to give the individualised advice suggested by the Appellant. It
is said that therefore, for purposes of s 84(4ZA) VATA,
HMRC was entitled to be satisfied that there were grounds for its decision. HMRC
relied on Burke v Revenue & Customs [2008] UKVAT V20881, HM
Revenue and Customs v Burke [2009] EWHC 2587 (Ch), Skinner (t/a DLS
Packaging) v Revenue & Customs [2010] UKFTT 64 (TC), SD Solutions
Ltd v Revenue & Customs [2010] UKFTT 228 (TC) and Anycom Ltd v
Revenue & Customs [2011] UKFTT 654 (TC).
The Tribunal’s findings
20.
The Tribunal finds that the HMRC decision did not in terms consider the
specific circumstances invoked by the Appellant, referred to in paragraph 8
above, nor did the review decision consider the submissions referred to in
paragraph 9 above.
21.
On its reading of those decision letters, the Tribunal is satisfied that
they did not consider those specific circumstances at all. Mr Bingham
suggested that it could be inferred that the decision maker considered
everything advanced by the Appellant, and that the decision did not need to
refer to every consideration individually. However, the Tribunal considers
that the decision needs to show at least that the core elements of the
Appellant’s case were considered. The Appellant was not simply saying that the
FRS would be more advantageous to him, and that he was suffering financially.
His point was that this was not a case of a business not knowing in advance
whether or not the FRS would be more advantageous, and then applying for the
scheme retrospectively when it was established with hindsight that it would
have been more advantageous. Rather, his case was, in essence, as follows. He
had had good reason at the outset for thinking that his turnover would be above
the threshold for VAT registration and above the threshold making him
ineligible for the FRS. His expectations turned out to be catastrophically
wrong, which he could not have foreseen. Nonetheless he did not apply for the FRS
earlier because he still had expectations that the situation would improve,
which also proved to be wrong. So catastrophically wrong were his expectations
that he need never have registered for VAT at all, and he is currently
suffering considerable financial hardship.
22.
The HMRC decisions do not consider whether this peculiar combination of
circumstances amounts to exceptional circumstances that would justify granting
retrospective application of the FRS. The guidance makes clear that “Each case
should be considered on its own merits” and that “all relevant facts” must be
considered. The guidance is expressed in non-mandatory language. In referring
to exceptional circumstances that might justify retrospectivity, the policy
states, in an open-ended way, what “in principle” such circumstances are
“likely” to involve. The guidance does not lay down any hard and fast rules.
In contrast, the 4 April 2012 HMRC review decision states for instance that
“there would need to be firm evidence that a trader would be put out of
business as a direct result of a decision to refuse retrospection”. Not
only does the decision suggest that this is a hard and fast rule, but the
language used here does not itself even appear in the guidance.
23.
The Tribunal therefore considers not only that the HMRC decision maker
has not considered all of the circumstances advanced by the Appellant, but also
has not properly applied the guidance. For this reason, the Tribunal finds
under s 84(4ZA) VATA that
HMRC could not reasonably have been satisfied that there were grounds for the
decision” (compare Anderson at [29]-[30]).
24.
The Tribunal therefore proceeds to make its own decision on the
Appellant’s application for retrospective application of the FRS.
25.
Because each case must be considered on its own particular merits, the
cases relied on by HMRC afford little assistance. In Burke, the
Chancery Division ultimately held that HMRC were entitled to make the original
decision that they did, and that HMRC were under no duty to raise the FRS with
the appellant in that case. In Skinner, SD Solutions and Anycom,
the circumstances were not identical to the present case, and in any event, as
noted in SD Solutions at [25], “Similarities in the factual position
will not necessarily result in similar outcomes”.
26.
In making its own decision, the Tribunal has regard to the HMRC
Guidelines. The guidelines state that the fact that less tax would be paid
under the FRS is “not sufficient reason” to authorise retrospectivity, but do
not suggest that this is a wholly irrelevant consideration (compare Wadlewski
referred to above). The Tribunal is satisfied that in the present case there are
exceptional circumstances justifying retrospectivity. It is not a simple case
of a business being unaware of the FRS, or simply realising after the event
that less tax would have been paid under the FRS. It is a case where reasonable
expectations proved unforeseeably to be catastrophically wrong, to the extent
that the Appellant fell far short of the threshold for registering for VAT at
all, and where the Appellant is now suffering considerable financial hardship.
27.
For the above reasons, the Tribunal allows the appeal. In the
circumstances it is unnecessary to address the Appellant’s other arguments
referred to at paragraph 18(3)-(6) above, other than to note that the Tribunal
did not find them persuasive.
28.
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.
DR CHRISTOPHER STAKER
TRIBUNAL JUDGE
RELEASE DATE: 5 June 2013
