WIN: Retrospective Application for Flat Rate VAT

In addition to being a topic on VAT, this article also acts as a warning that when attempting to challenge HM Revenue & Customs rigid framework you must be prepared to behave like a dog with a bone in the face of ignored letters and stock replies containing the dark arts of copy and paste in order to avoid interaction with a “real human being” at HMRC.

There are a number of schemes a business can use to calculate and pay its VAT. One of these schemes is the Flat Rate Scheme where, in essence, you pay a fixed rate of VAT and keep that difference between what you charge your customers and pay over to HMRC. You can’t reclaim the VAT on your purchases – except for certain capital assets over £2,000 and to join the scheme your VAT turnover must be less than £150,000 (excluding VAT) and you must apply to HMRC.

Because, for certain taxpayers, using the flat rate scheme can reduce the overall level of tax paid to HMRC it is not considered allowable to apply for the scheme retrospectively. An application should be made and the use of the scheme will usually start from the date that the application is received and or/accepted. The view is given that the adoption of the scheme is to make calculating your VAT easier, not cheaper.

Our Client

Our client, a limited company, had been registered for VAT under the standard accounting arrangements since its incorporation in April 2012. It had a previous advisor who for two years had neglected to review the VAT options available to the client periodically. They came to us (on other matters, which we resolved) and we undertook a VAT review. We discovered that the Flat Rate Scheme would have worked better for them, both financially and in terms of administrative burden. We applied immediately but also decided to take a punt on a retrospective application (because we can, and because if you don’t ask, you don’t get!).

Our Argument

Regulation 55B(1)(b) of the VAT Regulations 1995 gives HMRC the power to allow a retrospective start date for the Flat Rate Sheme. Our understanding of the regulation, and also of HMRC’s own guidance within FRS3200 – Treatment of Applications: Can HMRC allow a retrospective start date for FRS? and also within FRS3300 – Treatment of Applications: Considering requests for retrospective use of the FRS is that each retrospective claim case should be considered in its own merits which in our case were:

  • Lack of advice from the previous advisors placed the client at an unfair disadvantage.
  • The client would have benefitted from reduced administrative burden in terms of time spent preparing VAT returns had they been advised properly.
  • It is not equitable that two businesses with the same turnover trading in the same circumstances could be liable to different amounts of tax.
  • That our case had similar grounds to the case of Geoffrey Seeff t/a TPL Associates v HMRC TC02738 [2013].

We expected a firm “no” from HMRC but what we did get was surprising…..

Head vs Brick Wall

Our application was sent on 26 September 2014 along with a request for an explanation of their decision regarding the retrospective application covering all of the points made.

We then had to send another letter on the 27 November requesting this all again, to which we received an automated reply containing a paragraph relating to FRS3300 stating that retrospective applications were not considered by HMRC yet no reply to our points surrounding FRS3300 – Treatment of Applications: Considering requests for retrospective use of the FRS, FRS3200 – Treatment of Applications: Can HMRC allow a retrospective start date for FRS? and HMRC’s powers and options available to them under Regulation 55B(1)(b) of the VAT Regulations 1995, nor did we get a response to the individual points we raised above and their comparison to Geoffrey Seeff t/a TPL Associates v HMRC TC02738 [2013].

The response was clearly a copy and paste “stock” response and was not what we asked for so we issued a further letter on 29 December 2014 to which we received no response.

We wrote again on 3 February 2015 which not only detailed all the previous correspondences but also stated that our letter was a final notice before an intended filing of a writ of mandamus (A mandamus is an order from a court to an inferior government official ordering the government official to properly fulfill their official duties or correct an abuse of discretion). Lo an behold, we actually received a reply! The reply confirmed that a “colleague in Wolverhampton” did not follow up the request to backdate the application but having now attended to the matter she was not able to  accept the retrospective application because of ….. (and she thereafter pasted the FRS3300 guidance that covered the statement that the Flat Rate Scheme is adopted for simplification of record keeping and not a money saving scheme)!!

No comments on any of our points, but she did, rather unhelpfully, add the statement: “I feel that your client does not qualify for retrospection” without any embellishment.

Given the fact that a decision had now been made, our only course of action was to request that the ask that the matter be reviewed by a HMRC officer not previously involved in the case. We re-applied under these grounds and requested firm answers from a human being unassisted by automatic or copy-paste responses, and one who was not going to comment on his or her feelings. This was issued to HMRC on 9 March 2015.

FINALLY!

And finally a proper five page response arrived today, 09 May 2015, and well written I may add. The new HMRC officer gave a whole number of rebuttals to the retrospective application citing other Tribunal cases both before and since that of Geoffrey Seeff t/a TPL Associates v HMRC TC02738 [2013] and that in short, HMRC supported their refusal to allow retrospection back to the date of the clients incorporation and registration for VAT but did agree that after considering our arguments that it that a retrospection backdated to June 2014 was appropriate in this case, and it would be down to a Tribunal, if we wanted to go down that route, to decide further on any parts of the decision that we disagreed upon.

SUMMARY

A small victory perhaps but our client has now benefited from three additional months of adjusted VAT, which is not all bad considering it was a bit of a punt in the first instance. Retrospective applications are always automatically refused and the grounds for acceptance are extremely slim. For the one Tribunal case that our clients had a tenuous link to there were at least four other cases that were clear victories for HMRC. Obviously we chose not to mention these, and the final letter from HMRC commented on three of those.

All this additional work cost our client nothing, and they gained from it. I am glad we pushed with as it’s the principle of thinking that taxpayers will make do with un-personalised and often automated replies from HMRC on questions, decisions, and requests for clarification that frustrates us. You have to prod, and prod and then prod some more to illicit a human response and we strongly feel this should not be allowed to continue, which is why we don’t take it and always push as hard as we can for our clients.

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