20494

VAT – FLAT RATE SCHEME – Assessment withdrawn – Respondents maintain that the Appellant operated as management consultant thereby attracting a higher flat rate percentage – satisfied that the Respondents acted reasonably in respect of their categorisation of the Appellant’s business as a  management consultant and in their decision as to when the new flat rate percentage should start – discretion exercised not to award interest on the returned deposit – Appeal dismissed in respect of the substantive disputes. 

MANCHESTER TRIBUNAL CENTRE

	KEN REID LIMITED 	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      MOHAMMED FAROOQ           (Member)	  

Sitting in public in Birmingham on 18 October 2007

Ken Reid represented the Appellant

Richard Chapman, counsel instructed by the Solicitor for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2007

DECISION
The Appeal
1.	This Appeal concerned a dispute about the correct trade sector classification of the Appellant’s business for the purposes of the VAT Flat Rate Scheme. The Appellant contended that its business fell within the category of all other activity not elsewhere specified which attracted a flat rate of 11 per cent.   Whereas the Respondents decided that the correct classification for the Appellant’s business was management consultancy which merited a flat rate of 12.5 per cent.
2.	The Respondents initially issued an assessment on 22 December 2006 for unpaid VAT in the sum of £6,821 which was backdated to 1 October 2003. The original Notice of Appeal was against the assessment. However, on 2 May 2007 the Respondents withdrew the assessment, and informed the Appellant that the revised rate of 12.5 per cent would apply from the time the discrepancy was discovered.
3.	The Respondents considered that the assessment was properly raised, however, in the particular circumstances of the case they decided it would be unreasonable to assess for unpaid VAT and exercised their discretion to withdraw the assessment. The Respondents in taking this decision were mindful of the complexities of the flat rate scheme and that the Appellant’s business was not easy for an untrained person to categorise.
4.	At the hearing Respondents’ counsel submitted that no appeal lied before the Tribunal because the disputed decision had been withdrawn. The Appellant did not take up the Respondents’ invitation to withdraw the Appeal. After hearing further representations from both parties, we decided that a substantive Appeal existed regarding the following  matters:
(1)	What was the correct categorisation of the Appellant’s business for the purposes of the VAT Flat Rate Scheme?
(2)	 If the Respondents’ classification of management onsultancy was correct from which date should it apply?
(3)	 Was the Appellant entitled to an award of interest on the unpaid tax which was deposited with the Respondents and subsequently returned following the withdrawal of the assessment. 
The Tribunal’s Jurisdiction
5.	Under section 84(4ZA) of VATA 1994 our powers on Appeal in respect of disputes concerning the application of the VAT Flat Rate Scheme are limited to considering the reasonableness of the Respondents’ decision.  We are not permitted to substitute our own judgment for that of the Respondents. The issue for the Tribunal was whether the Respondents’ categorisation of the Appellant’s business and the date from which the categorisation applied were decisions which no reasonable body of Commissioners could have arrived at. In order for the decisions to be reasonable the decision maker must have considered all relevant matters and disregarded irrelevant matters. 
6.	Section 84(8) of VATA 1994 gives the Tribunal discretion to award interest to an Appellant in the following circumstances:
“Where on an appeal it is found –
(a)	that the whole or part of any amount paid or deposited in pursuance of subsection (3) is not due; or
(b)	that the whole or part of any VAT credit due to the Appellant has not been paid.
so much of that amount as is found not be due or not to have been paid shall be repaid (or, as the case may be, paid) with interest at such rate as the tribunal may determine; and where the appeal has been entertained notwithstanding that an amount determined by the Commissioners to be payable as VAT has not been paid or deposited and it is found on the appeal that that amount is due, the tribunal may, if thinks fit, direct that that amount shall be paid with interest at such rate as may be specified in the direction”.
The VAT Flat Rate Scheme
7.	The flat rate scheme was introduced with effect from 25 April 2002. The scheme was a simplification measure, allowing taxpayers within specific turnover limits to pay VAT as a percentage of turnover instead of working out the VAT on sales and purchases (normal accounting).  The taxpayer applies to join the scheme. 
8.	The Respondents have drawn up a table of trade sectors and allocated a flat rate percentage to each one. The tax payer is responsible for choosing which trade sector best fits his activities and then using the flat rate assigned to that trade sector when calculating VAT due under the flat rate scheme.
9.	The Respondents’ policy guidance (V1-23 VAT Schemes Chapter 6: Flat Rate Scheme) provides that if they disagree with a tax payer’s’ choice of trade sector and that the payer has been reasonable with his choice, they will not alter the sector with immediate or retrospective effect or assess for any possible under-declaration of VAT. The Respondents, however, will advise a tax payer which trade sector to use from the date of the next anniversary of him joining the scheme. If a tax payer has not been reasonable in his choice of sector, the Respondents would assess for past periods and consider banning the tax payer from using the flat rate scheme.
10.	The trade sector management consultancy includes public relations, business consultancy, management consultancy and financial consultancy.
The Evidence
11.	We heard evidence from the Appellant and the two Officers, Joanna Denning and John Thompson, who decided that the Appellant’s trade sector was management consultancy. Each party supplied their own bundle of documents.
The First Dispute: What is the Correct Categorisation of the Appellant’s Business?
12.	Mrs Denning and Mr Thompson  took into account the following information in arriving at their classification of management consultancy:
(1)	The Appellant’s description of its business in the VAT 1 which was Consultancy – Gas Transportation.
(2)	The Appellant’s response of 14 October 2006 to the Respondent’s request for additional information.  The Appellant was set up in 2003 to provide advice to companies wishing to use the National Grid’s transportation system. Its main business activities were reviewing  contracts and agreements with the National Grid, giving advice to clients on issues and risks arising from the contracts, identifying strategies for dealing with critical issues, and occasionally negotiating terms more suited to the client’s requirements. The Appellant considered commercial adviser as a better description of its business.
(3)	The Appellant’s description of a typical week set out in its letter of 24 November 2006 where Mr Reid attended various businesses giving advice on contracts, reviewing letters and presentations, participating in various meetings about operations and shipping,  and researching salient topics.
(4)	The Respondents’ guidance in VAT Notice 741 on the definition of  services of a consultant as applied in determining Place of Supply of Services, which was “the normal services of experts in all professional areas who act in an accepted professional or advisory capacity”.  
13.	Mr Reid on behalf of the Appellant went through the list of the trade sectors with a colleague, and concluded that the Appellant’s business did not match the description of any of the specified trade sectors. He, therefore, decided that the fall back of any other activity that is not listed elsewhere was the most appropriate category for the Appellant.
14.	Mr Reid referred to the Institute of  Management Consultancy’s definition of management consultancy which stated that
“the provision to management of objective advice and assistance relating to the strategy, structure, management and operations of an organisation in pursuit of its long term purposes and objectives. Such assistance may include the identification of options with recommendations, the provision of additional resource, and or the implementation of solutions”.
15.	Mr Reid considered that the Appellant’s business did not fall within the definition of management consultancy because it was not involved with change management. He looked at the list of skills for a management consultant as identified by the Institute of Management Consultancy and concluded that only one of the nine skills applied to his work, namely, excellent interpersonal skills. Mr Reid was trained as an engineer not as a management consultant. Equally Mr Reid considered that business consultancy was about how a business should be run which did not fall within the purview of the Appellant’s activities.
16.	Mr Reid supplied three letters from colleagues who worked with him when he was employed by the National Grid as a commercial manager negotiating and agreeing agreements for customers to be connected to, and to flow gas in and out of the National Transmission System. His colleagues considered that Mr Reid effectively  carried on the same role in his company after he left National Grid. Two colleagues described Mr Reid as a commercial consultant. They all were of the opinion that he was not a management consultant.
17.	Mr Reid in cross-examination stated that he saw himself as a consultant and that business and commerce were inter-changeable words. Mr Reid described his consultancy as a broad activity which involved advising businesses about viability of the proposals from the National Grid.
18.	Our jurisdiction in this Appeal was limited to considering the reasonableness of the Respondents’ decision to categorise the Appellant’s business as a management consultant. Mrs Denning and Mr Thompson placed weight on the Appellant’s description of its business as a consultant giving objective  advice to businesses on a key part of their infrastructure (connection with the National Grid) which was critical to business survival and growth. They formed the view that the Appellant was using Mr Reid’s professional expertise to give advice to gas suppliers on areas of their operations crucial to the running of their businesses. They concluded from the information supplied by the Appellant that its activities were those of a business consultant which formed a sub-set of the management consultant trade sector for the flat rate scheme.
19.	The Respondents’ guidance on the flat rate scheme gave no definition of the various trade sectors. The guidance consisted of broad headings of business activities, many of which were self explanatory. The Respondents expected businesses to select the trade sector category that best fits their activities but the Respondents retained the power to alter their selection if they disagreed with it. The fall back category of any other activity that is not listed elsewhere was a choice of last resort where it was not reasonable to classify the business activities in a specified trade sector. The guidance required the various headings of activities to be interpreted reasonably, which involved construing the type of activities broadly in accordance with their ordinary meaning.
20.	 We are satisfied that the Respondents acted reasonably in placing the Appellant’s business in the trade sector of   management consultant. They made their decision on information supplied by the Appellant. They placed weight on the Appellant’s depiction of itself as a consultant, and its description of its activities of giving objective advice, determining strategy on critical issues and negotiating contracts to businesses involved in the supply of gas. The Respondents were correct to place weight on these facts as they were highly relevant for determining  the appropriate trade sector for the Appellant. We found no evidence that the Respondents took account of irrelevant matters or disregarded relevant matters in their decision making. We hold that the Respondents classification of the Appellant’s activities as a business consultant was reasonable. The essence of the Appellant’s business of giving objective advice to gas suppliers on a core aspect of their business operations matched the description of business consultant in ordinary usage, and provided the best fit with the Appellant’s business. 
21.	We found that the Appellant’s evidence did not add anything new to the information already provided to the Respondents. The letters from Mr Reid’s colleagues repeated the Appellant’s assertion that it was operating as a commercial consultant rather than as a management consultant. We consider that the Appellant and Mr Reid’s colleagues applied a narrow technical definition of management consultant which was not in our view a reasonable approach to adopt for the interpretation of the trade sectors. The Appellant overlooked the sub-category of business consultant within the overall category of management consultant. We saw no distinction in the meaning of the words commercial and business. Mr Reid accepted in evidence that they were interchangeable. 
Second Dispute: From which date should the Respondents’ classification of management consultancy the new rate of 12.5 per cent apply?
22.	The Appellant was registered for VAT under the flat rate scheme with effect from 15 May 2003. The Appellant submitted that the new rate of 12.5 per cent should apply from the 15 May 2007 which was the next anniversary of its admission to the flat rate following the Respondents’ change of trade sector. Mrs Piper who took the decision to cancel the assessment determined that the new percentage should commence from the date of the discovery of the discrepancy which was the start date of the 12/06 VAT return.
23.	The Appellant relied upon the Respondents’ policy which in essence stated that  any change to its flat rate percentage applied from the next anniversary of  joining the flat rate scheme provided the Appellant’s original choice of the fall back category was reasonable. The Appellant submitted that the reasonableness of its original choice was the principal reason why Mrs Piper withdrew the assessment. Thus the policy should take effect with the change operating from the 15 May 2007.
24.	Having examined Mrs Piper’s correspondence with the Appellant, we find that her reason for the withdrawal was that she considered the issue of the assessment  unreasonable not that the Appellant acted reasonably in its original choice of any other activity that is not listed elsewhere.  In her first letter dated 2 May 2007 she simply recorded that the Appellant considered its choice reasonable.
25.	The Respondents submitted at the hearing that the Appellant had not been reasonable with its original choice of trade sector. The notes kept by Mr Reid of his discussion with a colleague about the appropriate trade sector were perfunctory. Mr Reid did not seek advice from the Respondents before he made his selection. He applied a rigid interpretation of the trade sector headings which was not in keeping with the reasonable approach expected by the Respondents. We found under the first dispute that the Appellant’s choice was unreasonable. In those circumstances it was not incumbent upon Mrs Piper to apply the Respondents’ policy on changes of flat rate percentages from the next anniversary.
26.	 Mrs Piper’s decision to start the new flat rate percentage from the date of discovery of the discrepancy was consistent with her withdrawal of  the assessment for quarters ending 09/06. Further her decision acknowledged that the Appellant should not be penalised by the Respondents failure to spot the wrong classification earlier. We are satisfied that Mrs Piper’s decision was eminently fair to the Appellant and reasonable. We, therefore, find that the new flat rate percentage for the Appellant should start with the quarter 12/06.
Third Dispute: Is the Appellant entitled to an award of interest on the deposit of unpaid VAT?
27.	As the Appellant did not formally withdraw its Appeal against the assessment we have adiscretion under section 84(8) of the VAT Act 1994 to consider an award of interest on the sum deposited by the Appellant which was subsequently returned following the withdrawal of the assessment. 
28.	The Respondents objected to an award of interest because the withdrawal was based on policy rather than legal considerations. Mrs Piper was of the view that as a matter of law the tax was properly due. The Respondents considered that they should not be penalised by an award of interest where there was ample evidence to support  the lawfulness of the assessment.  The Appellant submitted that it should be treated equally with the Respondents which were entitled to an additional sum for interest when they imposed the assessment.
29.	We regard Mrs Piper’s decision to withdraw the assessment on policy grounds as a relevant consideration for the exercise of our discretion to award interest. Further we consider that the Respondents had strong prospects of resisting the Appeal had the assessment not been withdrawn. Taking those two facts together, we make no order in favour of the Appellant for interest in respect of the returned deposit
Decision
30.	We find the Respondents’ decisions categorising the Appellant’s business under the trade sector of management consultant with the new flat rate percentage starting with the quarter 12/06 reasonable. We make no order in favour of the Appellant for interest in respect of the returned deposit. We, therefore, dismiss the Appeal. We make no order for costs.
31.	We formally strike out the Appellant’s appeal against the assessment dated 22 December 2006 on the ground that no appeal lies to the Tribunal because the disputed assessment has been withdrawn by the Respondents.

MICHAEL TILDESLEY OBE
CHAIRMAN
Release Date: 6 December 2007

MAN/07/0345