In the First-tier tribunal case of Yeabsley Financial Solutions Limited TC02044, published on 19 June 2012, the chairman dismissed an application by the appellant to withdraw from the flat rate scheme retrospectively.
Yeabsley Financial Solutions Ltd was registered voluntarily for VAT with effect from 1 June 2007. On 31 December 2007 Mr Yeabsley requested that the company be allowed to join the Flat-Rate Scheme (“FRS”) for VAT purposes with effect from 1 June 2007, and this was granted retrospectively by HMRC.
HMRC inspected the business records and discovered that in calculating the VAT liability the net rather than the gross turnover figures had been used by the business to calculate the amount payable under the FRS. As a result the business was assessed £4,958, the accuracy of which was not disputed by the business.
The business tried to have its registration under the FRS withdrawn retrospectively to the date when it entered. However, the business wished to remain in the FRS for the future. The appellant explained that they had not understood the workings of the FRS and on reflection should not have entered into it.
HMRC refused to withdraw the business from the FRS retrospectively and the business appealed to the Tribunal.
The Tribunal’s function in this type of appeal is limited to examining whether HMRC have acted reasonably. Sections 83-84 VATA 1994, set out the powers of the Tribunal in such appeal proceedings. In particular section 84(4ZA) provides that a Tribunal should not allow the Appeal “… unless it considers that HMRC could not reasonably have been satisfied that there were grounds for the decision …”
Regulation 55 of the VAT Regulations 1995, applies to “Flat-Rate Traders” and particularly Reg. 55M(1)(g) allows for a business to opt to withdraw from the Scheme. In that event, under Reg. 55Q(1)(e) that withdrawal takes effect from HMRC being so notified “or from such earlier date as may be agreed”. HMRC contended that the appellant could not insist on withdrawal from the FRS from an earlier date.
HMRC only allow retrospective withdrawal from the FRS exceptionally. No exceptional reasons had been shown by the appellant. They had merely shown that the FRS was financially disadvantageous to the business.
HMRC contended that the purpose of the FRS was to simplify administration for the taxpayer, not to give him a financial benefit. To allow backdating of withdrawal would in the present case undermine the purpose of the Scheme.
The Tribunal considered that HMRC had not acted unreasonably and although they had some sympathy for the business, it was the responsibility of the business to assess the full financial and other implications of joining the FRS.
This case serves as a timely reminder to properly determine the benefits of the FRS before making an application to join and that any withdrawal from the scheme should be made on a timely basis.
Readers will have noted that HMRC allowed entry to the FRS retrospectively but did not allow the same retrospection for withdrawal from the scheme…a point which does not appear to have been mentioned by the appellant.