[2009] UKFTT 94 (TC)

TC00062
FIRST TIER TRIBUNAL
TAX	Reference No: LON 2007/739 

VAT – FLAT RATE SCHEME – denial of input tax claim on construction costs of a riding arena – Appellant not entitled to recover input tax under flat rate scheme except on capital expenditure goods exceeding £2,000 – was the denial of the input tax in the correct form – yes – were the disputed supplies goods or services – services except haulage which was part of a single supply of goods – was the decision to refuse retrospective withdrawal reasonable – no – Appeal allowed in part

	SALLY MARCH   	Appellant

	- and -

	HER MAJESTY’S REVENUE and CUSTOMS	Respondents

			Tribunal: MICHAEL TILDESLEY OBE	 (Chairman)
				      RICHARD CORKE FCA (Member)	  

Sitting in public in Bristol on 20 February 2009

Nigel Ferrington VAT consultant for the Appellant

Richard Smith counsel instructed by the Solicitor’s office of HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2009

DECISION
The Appeal
1.	The Appellant was appealing an assessment in the sum of £1,268 and an adjustment to a return denying an input tax credit in the sum of £11,750.32. The basis for the assessment and the adjustment was to deny the Appellant the opportunity to reclaim input tax on certain items because she accounted for VAT on the flat rate scheme.
2.	The Appellant was unable to attend the hearing in person due to illness. She was represented by Mr Ferrington who presented her case. The parties were content for the hearing to proceed in the absence of the Appellant since the facts of the case were largely agreed.
The Background
3.	The Appellant was the sole proprietor of a riding school. She registered for VAT with effect from 1 October 2005, and at the same time applied to account for VAT under the flat rate scheme. During 2006 the Appellant arranged for the construction of a new riding arena at her riding school. The Appellant claimed VAT on the construction costs. The Respondents disallowed the repayment claim on the ground that the construction costs related to a supply of services rather than a supply of goods. Under the flat rate scheme the Appellant was not entitled to recover VAT unless it was connected to the purchase of a capital item exceeding £2,000.
4.	The repayment claim covered two VAT periods. In respect of the first period 09/06 the Respondents had refunded the Appellant with the VAT claimed. Thus the Respondents raised an assessment in the sum of £1,268 to recover the VAT wrongly claimed. The repayment claim under the 12/06 VAT return had been withheld pending a pre-credibility check, following which the Respondents reduced the claim  by £11,750 and notified the Appellant accordingly.  
The Dispute
5.	The Appellant identified three separate areas of dispute, namely:
(1)	The Respondents’ letter amending the VAT return 12/06 was not in the correct form and stated the wrong period.
(2)	The disallowed VAT claim related to supplies of goods not services.
(3)	The Respondents acted unreasonably in not allowing the Appellant to withdraw retrospectively from the flat rate scheme.
First Dispute: Incorrect Notification
6.	This dispute related to the repayment claim for the 12/06 return.  The Respondents had withheld the claim pending the outcome of a pre-credibility check. The Officer who carried out the check was satisfied that the Appellant was not entitled to the repayment of VAT relating to the construction costs. The Officer, therefore, amended the return which resulted in a repayment claim of £383.87 instead of the original claim of £12,134.19. The Officer notified the Appellant of the amendment in a letter dated 2 February 2007, in which she mistakenly stated that the return for 12/07 had been amended.
7.	The Appellant argued that the amendment to the VAT return was invalid in two respects, and, therefore, should not stand. First the letter of 2 February 2007 referred to 12/07 not 12/06, in which case the correct VAT quarter for the disputed amount had not been identified. Second the letter did not conform with the Respondents’ internal guidance on the form of assessments.
8.	 The Respondents pointed out that the ground of invalid assessment was raised late in the day, some two and half weeks before the hearing, and did not form part of the original pleaded case. The Respondents, however, contended that the submission was without merit. 
9.	The Respondents considered that the Appellant was not misled by the Officer’s mistake in referring to a 12/07 return rather than the 12/06 return. The error was a typographical error and clear on the face of document which was sent on 2 February 2007, some eleven months before the anticipated submission date for the 12/07 return. Also the letter correctly identified the supplies and the names of the suppliers upon which VAT had been disallowed. 
10.	The Respondents’ principal submission was that the letter of the 2 February 2007 did not constitute an assessment. It was not necessary for the Respondents to exercise their assessment powers under section 73 because no VAT had been repaid pursuant to the disputed claim. The purpose of the 2 February 2007 letter was to adjust the 12/06 VAT return in order to reflect the Respondents’ decision to disallow part of the Appellant’s VAT claim. The VAT Regulations did not prescribe a method for notifying taxpayers of adjustments to their VAT returns. Thus no assessment was necessary and none was raised, as all the Respondents needed to do to regularise the position was to refuse the Appellant’s claim for a VAT repayment.
11.	We agree with the Respondents’ analysis. The 2 February 2007 letter did not constitute an assessment, as none was necessary to rectify the position. The letter correctly identified the amount of VAT disallowed, the disputed supplies and their suppliers, and gave brief reasons for the Officer’s decision. The reference to the 12/07 return was clearly a typographical error which would have been self evident to the Appellant. The Appellant was not misled by the letter of 2 February 2007 and was fully aware of what VAT had been disallowed by the Respondents. We, therefore, find that there is no substance to the Appellant’s contention that the Respondents’ refusal to repay VAT incurred in the 12/06 period did not follow the correct procedure.
Second Dispute: Goods not Services
12.	The Appellant contended that the VAT on the supplies made by Dunstan House Electricals and N J Popham were supplies of capital goods. The value of each supply exceeded £2,000 which meant that the VAT incurred could be recovered under the flat rate scheme.  The invoice from Dunstan House was for materials purchased for electrical work connected with the construction of the new riding arena.  The total cost was £5,875, of which £875 constituted the VAT. The invoice of NJ Popham concerned the supply and fit of kickboards, and the supply and erection of a building with a total value of £58,482.10, of which £8,710 represented the VAT. The Appellant accepted that the purchase and installation of the electrical materials had been carried out by the contractor, and that NJ Popham constructed the building using the materials identified in the invoice. The Appellant confirmed that the construction was of a bespoke building to a specification, and not the erection of a pre-fabricated building. 
13.	In the Appellant’s view the supply was one of a building which had been capitalised in the Appellant’s accounts as an asset. The Appellant relied on the VAT & Duties decision in Whitechapel Art Gallery released 27 June 2008. The case concerned the entitlement to deduct input tax under Lennartz principles on the refurbishment of a former library. The Tribunal concluded at paragraph 31 that 
“it would be wholly unrealistic to treat the construction work otherwise than as the acquisition of capital goods”.
14.	The Respondents submitted that a supply made in the course of a construction of a building was a supply of services. In the Respondents’ view it was inappropriate for VAT purposes to look at the finished building and deem that to be capital goods as that did not reflect what actually had been purchased by the Appellant. The Respondent pointed out that the Whitechapel decision concerned a different legal point, and was subject to Appeal. The Respondents considered that the approach adopted by the VAT & Duties Tribunal in Eventful Management Limited (VAT Decision Number 20300) which, concerned the same issue, namely, whether the supplies to a flat rate scheme trader constituted capital goods.
15.	Part V11A of the VAT Regulations 1995, regulations 55A to 55V sets out the details of the flat rate scheme. Regulation 55A(1) defines capital expenditure goods as:
“any goods of a capital nature but does not include any goods acquired by a flat rate trader (whether before he was a flat rate trader or not) –
a)	for the purpose of resale or incorporation into goods supplied by him;
b)	for consumption by him within one year, or
c)	to generate income by being leased, let or hired”.
16.	Regulation 55E(1) defines the requirements to be met for VAT to be reclaimed on capital expenditure goods under the flat rate scheme:
“For any prescribed accounting period of a flat rate trader, he is entitled to credit for input tax in respect of a relevant purchase of his of capital expenditure goods with a value, together with VAT chargeable of more than £2,000”.
17.	HM Revenue and Customs Notice 733 on the Flat Rate Scheme (March 2007 edition) provides a definition of capital expenditure goods which is “those goods which are bought to be used in the business but are not used by it”. Notice 733 states that supplies of services do not qualify as capital expenditure goods. Finally Notice 733 gives examples of “What counts as goods and services?”, and “What counts as capital or not capital goods?”
18.	 According to Notice 733 where a builder builds an extension to his business premises supplying all materials himself and including their cost in his final bill. No VAT is claimable as bricks and materials are not capital goods.
19.	In this Appeal the question to be asked is “What did the Appellant purchase?” The invoice of N J Popham stated that they were providing supplies of fitting and erecting materials to make a riding arena. The Appellant accepted that the electrical materials had been purchased by the electrician with whom the Appellant   contracted to install them in the building. The contractors were required to apply their skills to meet a specification for a building. They were not simply assembling materials. We find that the Appellant bought the services of contractors to construct a riding arena and install electrical materials. The contractors were supplying their services not supplies of tangible moveable property.
20.	The Tribunal in Whitechapel, however, decided that supplies of construction services can be placed on the same footing as the acquisition or construction of immoveable property. The Tribunal’s decision was based upon a careful examination of European Jurisprudence, and appeared to confirm the interpretation of capital expenditure adopted by the Appellant’s representative, which was expenditure reflected in assets of an enduring nature as opposed to expenditure on consumables. The Whitechapel decision gave force to the Appellant’s submission that the expenditure incurred by the contractors should be regarded as capital expenditure resulting in capital goods.
21.	We carefully considered the Whitechapel decision which was about whether input tax incurred on the refurbishment of an existing building could be recovered up front in accordance with the Lennartz principles. In our view it has no application to the characterisation of the supply and the principles of the flat rate scheme. We preferred the Respondents’ submission that a supply made in the construction of a building was a supply of services as they were consumed entirely in the finished building. We, therefore, hold that supplies of NJ Popham and Dunstan House were supplies of services which meant that the Appellant was not entitled to recover the VAT on those supplies under the flat rate scheme as they did not constitute capital expenditure goods.
22.	The Appellant raised a different point in respect of a supply from Martin Collins Enterprises which was for a supply of 155.28 tonnes of Activ-track and haulage. The Respondents allowed the input tax claim on the Activ-track presumably on the ground that it was capital expenditure goods in excess of £2,000 but disallowed the VAT claim in the sum of £273 on haulage because it was a supply of services. 
23.	The Appellant submitted that the haulage was incidental and part of the principal supply of Activ-track, with the result that it was a single supply of goods. Thus enabling the recovery of the entire VAT including that attributable to the haulage. The Appellant relied on a concession made by the Respondents in the VAT & Tribunal decision of Anthony Jessop Price and Kay Price v HMRC heard on 24 April 2008. The Appeal involved a claim for VAT incurred on haulage services under the Do it Yourself Builders Scheme. During the hearing the Respondents conceded that they would refund VAT on haulage if such services were made by the same person who supplied the building materials, and in consequence issued a single invoice for the supply and delivery of the materials. The circumstances of the disputed supply in this Appeal replicated the terms of the concession made by the Respondents in the Price Appeal. The Respondents did not challenge the Appellant’s submissions. 
24.	We find that the haulage was incidental and part of the principal supply of Activ-track which constituted a single supply of goods. In those circumstances the Appellant was entitled to the recover in full the VAT incurred on the supplies made by Martin Collins more particularly described in the invoice dated 24 October 2006.  
Dispute Three: Retrospective Withdrawal from the Flat Rate Scheme
Background
25.	The Appellant contended that the Respondents  unreasonably withheld their agreement to  withdrawal from the flat rate scheme with effect from 1 July 2006, which if agreed would have permitted the Appellant to recover the VAT incurred on the construction of the new riding arena under normal VAT accounting.
26.	On 1 October 2005, the Appellant was registered for VAT and accepted onto the flat rate scheme. 
27.	On 13 June 2007 the Appellant challenged the assessment for 09/06 and the amendment to the 12/06 return. In the course of her challenge the Appellant enquired whether the option of withdrawing retrospectively from the flat rate scheme was available. 
28.	Mr Priest of the Respondents’ Appeals Team informed the Appellant that applications to leave the flat rate scheme normally take effect from the beginning of the VAT period after receipt of the withdrawal notice. The Respondents, however, may agree to an earlier date. Agreement on an earlier withdrawal date was allowed on a case by case basis and dependent upon the specific circumstances of the taxpayer. As a pre-requisite to considering retrospective withdrawal the Respondents would expect the Appellant to have maintained sufficient records to recalculate the returns using the standard method of accounting. The Appellant confirmed that she held sufficient records to carry out the necessary calculation.
The Disputed Decision
29.	Mr Priest, took the decision on behalf of the Respondents refusing retrospective withdrawal from the flat rate scheme. The reasons for his decision were set out in his letter dated 22 January 2008:
“Initially, I was asked by our policy team to consider whether to allow your client retrospective withdrawal from the flat rate scheme using similar principles to those applied in the Wadlewski case and this was why I asked you to provide the accounting information given in your fax of 8 November 2007.
On receipt of the figures I referred the case back to policy for advice and they have confirmed that the request for retrospective withdrawal from the flat rate scheme is to be refused.
Firstly an examination of the figures shows that the loss in gross profit for VAT periods 09/06 to 06/07 would be 23 per cent which falls short of the 40 per cent in the Wadlewski case and suggests that your client did not suffer hardship.
Secondly and more importantly the Wadlewski case dealt with long term hardship during day to day trading, whereas in your client’s case the difference in figures between normal accounting and the flat rate scheme was only for a short period of time based on the abnormal transactions relating to the construction of the new riding arena”.
30.	In reaching his decision Mr Priest had regard to the guidance of HMRC Policy Section on retrospective withdrawal. In an earlier letter to the Appellant’s representative dated 29 October 2007  Mr Priest set out the principles underpinning the Respondents’ policy for  retrospective withdrawal:
“ In considering retrospective  withdrawal it should be borne in mind that the aim of the scheme is to save time and compliance costs through reduced record keeping. Recalculating previously rendered returns would negate the benefits of the scheme. From the Commissioners’ perspective the fact that your client would be better off financially is in itself not sufficient reason to agree to retrospective withdrawal.
Having said the above, it could be that by refusing retrospective withdrawal the difference between the amount of VAT your client pays under the flat rate scheme exceeds that under normal accounting to such an extent that they would suffer hardship.
In this respect, the Commissioners follow the principles established in the tribunal case of A and C Wadlewski VTD 13340. Although this case concerned retrospective change of retail scheme, the general principles of hardship apply to the flat rate scheme.
In the Wadlewski case …………..
The Tribunal found that in exercising their discretion to allow retrospective recalculation of a retail scheme, consideration must be had to any exceptional circumstances pertaining to the case.
Although not considered by the Commissioners prior to their decision to refuse recalculation, the tribunal found that a significant reduction in profit caused by the payment of VAT using one retail scheme as opposed to another one was sufficient exceptional circumstance to allow recalculation.
In the Wadlewski case, the reduction in profits of the business caused by the use of retail scheme G as opposed to retail scheme F amounted to some 40 per cent.
As a matter of principle, the Commissioners have, therefore, accepted that where a taxpayer chooses to use a particular retail scheme as opposed to another for which they were equally eligible, and the choice affects their profit by reducing it by 40 per cent or more, then this is an exceptional circumstance. In such a case, retrospective recalculation using the alternative retail scheme would be allowed.
My referral to policy in this case was to establish whether the principles above would equally apply to a choice between the flat rate scheme and normal accounting. I have now been informed that this is the case”.
31.	 HMRC Policy Section advised Mr Priest that a significant reduction in profit referred to gross profit rather than net profit. The Policy Section did not give a reason for choosing gross profit.
32.	In evidence Mr Priest stated that his preferred course of action was to agree with the Appellant’s request for retrospective withdrawal from the flat rate scheme. In reaching his view he had regard to loss in net profit which produced an 86 per cent loss rather than a 23 per cent loss using gross profit. At the time Mr Priest carried out the calculations the Appellants’ 2006/07 accounts which had a 31 July year end were not available. Instead he compared the VAT differential between the flat rate scheme and normal accounting with projected profit figures. The projections were derived by multiplying the 2006 net profit figures with the 2007 turnover divided by 2006 turnover. Mr Priest did not know that the Appellant suffered a loss in 2007.
 The Appellants’ Case
33.	The Appellant submitted that the Respondents’ refusal to grant retrospective withdrawal was unreasonable in three respects. 
34.	First the Appellant considered that the Respondents’ published guidance on the flat rate scheme was misleading, which in her view was substantiated by the revisions in the subsequent edition of the guidance.
35.	 The accountants who advised use of the scheme were working from the then current February 2004 edition of Notice 733: Flat Rate Scheme for Small Businesses. Unlike the March 2007 edition, the February 2004 offered no guidance on the meaning of a capital asset. Paragraph 3.8 stating that
“If you buy a single capital asset with an invoice value including VAT of £2,000 or more you can claim the input tax on your VAT return in the normal way”.
36.	The accountants believed that having capitalised the construction expenditure in the accounts as an asset worth more than £2,000, the requirements of Notice 733 had been met enabling the Appellant to recover the VAT on the construction costs. Had the March 2007 edition been available at the time the Appellant applied to join the flat rate scheme with its detailed explanation of capital expenditure goods, the accountants may not have recommended the scheme.
37.	Second, the Appellant was of the view that Ms Candy, the visiting officer, recognised the unfairness and unsuitability of the scheme for the Appellant. It was Ms Candy who raised the possibility of the Appellant leaving the scheme from 1 July 2006. In her letter to the Appellant dated 2 February 2007 she said
“As discussed, you may wish to consider leaving the flat rate scheme retrospectively from 1 July 2006, in order to claim the input tax on services relating to the new indoor riding school and any capital assets less than £2,000 in value”.
38.	Third, under the flat rate scheme the Appellant was liable for £11,175 more in VAT than under normal accounting. The adverse differential caused hardship to the Appellant with the result that the business suffered a net loss of £4,960 in the year ending 31 July 2007. According to the Appellant she borrowed the money from the bank for the construction of riding arena on the understanding that the VAT incurred on the expenditure would be recoverable. The Respondents’ refusal to repay the VAT caused cash flow difficulties and resulted in pressure from the bank due to the continuing overdraft position. In the Appellant’s view, her circumstances met the Wadlewski test. The distinction between net and gross profit was irrelevant since the Appellant suffered a loss.
The Respondents’ Case
39.	Respondents’ counsel submitted that it was clear from regulation 55Q(1) (e) of the VAT Regulations 1995 that it was for the parties to agree the date on which a trader ceased to account under the flat rate scheme. The Respondents, therefore, had a discretion whether or not to reach an agreement, and as such their decision can only be impugned on grounds of unreasonableness. The Tribunal’s jurisdiction in this respect was governed by the principles established by the Court of Appeal in Customs and Excise Commissioners v John Dee Limited [1995] STC 941:
“to consider whether the Commissioners had acted in a way in which no reasonable panel of Commissioners could have acted or whether they had taken into account some irrelevant matter or had disregarded something to which they should have given weight. The tribunal may also have to consider whether the commissioners have erred on a point of law”.
40.	Counsel contended that the Tribunal should be cautious in concluding that the Respondents’ policy was unreasonable. Counsel acknowledged that there was no formal written policy but the Respondents approached the policy issues in a considered manner. The policy adopted of only granting retrospective withdrawal from the scheme in exceptional circumstances and of using gross profit as a measure of hardship was reasonable.
41.	Mr Priest was meticulous with the collection of financial information in order to make a decision. His approach could not be criticised. He took great care in reaching his decision. Mr Priest was required to have regard to the Respondents’ policy on retrospective withdrawal, and found no facts to justify departure from that policy.
42.	The Appellant did not have a legitimate expectation that retrospective withdrawal would be granted. Ms Candy’ advice did not commit the Respondents to a specific course of action. She was simply advising the Appellant that retrospective withdrawal was a possibility. In all the circumstances the Respondents’ refusal to grant retrospective withdrawal was reasonable.
Reasons for Our Decision
43.	Section 26B of VATA 1994 empowers the Respondents to make regulations in respect of the operation of the flat rate scheme, which are found in regulations 55A to 55V of the VAT Regulations 1995. Under regulation 55M(1)(g) a trader can opt  to withdraw from the scheme, which is from the date on which the Commissioners are notified in writing of his decision to cease using the scheme or such earlier date as may be agreed between the Commissioners and the trader (regulation 55Q(1)(e)). Thus the Respondents have a discretion to agree to an earlier date of cessation from the scheme. In this Appeal the Respondents exercised their discretion by refusing to terminate the Appellants’ use of the scheme from 1 July 2006.   
44.	Under section 84(4ZA) of VATA 1994 our powers on Appeal are limited to considering the reasonableness of the Respondents’ refusal to authorise the Appellant’s withdrawal from the scheme from the 1 July 2006.  We are not permitted to substitute our own judgment for that of the Respondents. The issue for the Tribunal was whether the Respondents’ refusal was a decision which no reasonable body of Commissioners could have arrived at. In order for the decision to be reasonable the decision maker must have considered all relevant matters and must not have taken into consideration irrelevant matters. 
45.	We have approached the question of reasonableness from the perspectives of the policy itself and of Mr Priest’s actual decision. 
46.	The Respondents’ Public Notice 733 (March 2007) edition on the Flat Rate Scheme simply stated at paragraph 12.1:
“If you wish to leave the scheme you must write and tell us. We would expect most business to leave at the end of the accounting period. However you may leave voluntarily at any time. We will confirm the date you left the scheme in writing”.
47.	At the time Mr Priest considered his decision there was no formal written policy on retrospective withdrawal from the scheme. Paragraph 12.1 of the Public Notice 733 was essentially a restatement of the legal position as set out in the 1995 Regulations.
48.	 Mr Priest alerted Respondents’ Policy section of the absence of guidance in this area, which he considered necessary because of the likelihood that other traders may find themselves in the same position as the Appellant. The Policy response acknowledged that an earlier date could be authorised in exceptional circumstances. Further hardship suffered by a trader from the differential VAT liability between the flat rate scheme and normal accounting may constitute exceptional circumstances. The response then went on to refine the concept of hardship by reference to the tribunal decision in Wadlewski from which was derived the principle that hardship started when the differential between the two accounting systems equalled a 40 per cent loss in profit. The concept of profit was then narrowed to gross profit.
49.	 We consider that the process adopted for arriving at the policy for retrospective withdrawal was flawed. We would have expected the Policy response to articulate the aims for the policy, and the mischief to be avoided followed by a statement of criteria to assist the decision-maker with his task. Instead the response focussed primarily upon the Appellant’s circumstances which undermined Mr Priest’s position and in effect made the decision for him.
50.	We find the 40 per cent gross profit benchmark for hardship arbitrary. The Policy response supplied no rationale for choosing gross rather than net profit. The Respondents justified the choice of 40 per cent profit by reference to the Tribunal decision in Wadlewski.  Although a 40 per cent profit loss was one of the facts in Wadlewski, it did not as such play a part in the reasoning for the decision. The decision was authority for the critical proposition that where the Commissioners’ discretion was engaged, the unquestioning application of a policy was not a proper exercise of discretion. In essence the Officer in Wadlewski did not consider all the relevant facts of the case when exercising  his discretion. The key fact ignored was the hardship caused to the retailer by choosing a particular retail scheme. 
“The Tribunal concludes therefore, in the exercise of its supervisory jurisdiction, that in the process in which the Commissioners exercised their discretion there was a degree of confusion, and that without any fault being attributed to any person, there was an insufficient consideration of the fact that the Commissioners' policy and the criteria laid down in Public Notice. 727 were subject to an overriding discretion on the part of the Commissioners, in exceptional circumstances. Furthermore in exercising that discretion the Commissioners clearly disregarded the amount of the overpayment which the use of one scheme produced by comparison with another, because they considered the amount of that overpayment to be irrelevant, simply because that it was the taxpayer who chose the scheme and different schemes would produce different results. It was unreasonable for the Commissioners not to consider whether a very high proportion of "over-payment" might not be an exceptional circumstance justifying an exercise of their discretion beyond the criteria they had laid down” (Wadlewski VTD 13340 at page 10).
51.	  We find the Respondents’ policy on retrospective withdrawal unreasonable in that it denied a proper exercise of discretion by the Officer reviewing the individual circumstances of the case, which in effect amounted to an error of law within John Dee principles. There was no set measure for determining gross profit as it was a matter of opinion or choice as to which costs should be taken into account in arriving at a gross profit. The 40 per cent gross profit benchmark for hardship had no rational or legal foundation.  The benchmark was derived from the individual circumstances of the Appellant rather than from any principled statement of policy, and was too prescriptive. The unreasonableness of the policy influenced the approach adopted by Mr Priest in his review of the Appellant’s request to terminate use of the flat rate scheme from 1 July 2006. Whilst we consider that Mr Priest approached the task with the utmost fairness and meticulousness on financial matters, his review, nonetheless, was skewed by the use of an artificial meaning of hardship. The application of the 40 per cent gross profit benchmark was rendered meaningless by the  discovery not known at the time of Mr Priest’s review that the Appellant actually suffered a loss in the 2006/07 accounts. Had a more balanced approach been adopted towards hardship, the subsequent revelation of a loss may not have undermined the decision.  
52.	The focus on financial matters meant that proper consideration was not given to the other matters raised by the Appellant. The revisions to the February 2004 edition of Notice 733 on capital expenditure items deserved greater consideration as it raised the possibility that the Respondents’ guidance was unclear and may have contributed to the Appellant’s error in joining the scheme. It appeared no weight was given to the Appellant’s assurances that she was able to calculate accurately and without difficulty her VAT liability under normal accounting for the disputed period. This was a relevant factor bearing in mind  Policy section comments about the  purpose of the scheme was to save time and compliance costs which may be negated by the recalculation of previously rendered returns. 
53.	We consider that Ms Candy’s advice was more than simply raising a possibility of retrospective withdrawal. Whilst we accept that the advice did not give grounds for a legitimate expectation, the advice nevertheless indicated that such an application was justified. Equally Mr Priest’s preferred course of action was to agree to the Appellant’s request. The views of the Officers on the ground added to the disquiet that the policy itself was unreasonable in that it did not allow a full consideration of the circumstances.
54.	We find that
(1)	  The Respondents’ policy on retrospective withdrawal unreasonable in that it denied a proper exercise of discretion by the Officer reviewing the individual circumstances of the case, which in effect amounted to an error of law within John Dee principles.
(2)	Mr Priest’s decision of 22 January 2008 was based on an unreasonable policy and as a result he placed too much weight on irrelevant matters in particular the 40 per cent gross profit benchmark and disregarded relevant matters.
55.	We, therefore, conclude that the Respondents’ refusal to agree to the Appellants’ request to withdraw from the flat rate scheme with effect from 1 July 2006 unreasonable. We allow the Appellant’s appeal on dispute three.
Decision
56.	We decided on the three disputes:
(1)	Dispute One: Incorrect Notification: there was no substance to the Appellant’s contention that the Respondents’ refusal to repay VAT incurred in the 12/06 period did not follow the correct procedure.
(2)	Dispute Two: Goods or Services: the supplies of NJ Popham and Dunstan House were supplies of services which meant that the Appellant was not entitled to recover the VAT on those supplies under the flat rate scheme as they did not constitute capital expenditure goods. The Appellant was, however, entitled to the recover in full the VAT incurred on the supplies made by Martin Collins more particularly described in the invoice dated 24 October 2006.
(3)	Dispute Three: Retrospective Withdrawal:  the Respondents’ refusal to agree to the Appellants’ request to withdraw from the flat rate scheme with effect from 1 July 2006 was unreasonable.
57.	We, therefore, allow the Appeal in part. For the avoidance of doubt we direct that the costs regime that applied to VAT Appeals as at 20 February 2009 applied. We consider that the Appellant has been successful with the substantive aspect of her Appeal and in those circumstances we order the Respondents to pay   reasonable costs incurred by the Appellant in connection with the Appeal. We give leave to either party to refer the question of costs to a Tribunal Judge sitting alone in the absence of agreement.

                                

                                 MICHAEL TILDESLEY OBE
TRIBUNAL JUDGE
RELEASE DATE: 7 May 2009

LON/

Notes
58.	A party wishing to Appeal this decision to the Upper Tribunal must seek permission by making   an application in writing to the Tribunal within 56 days of being provided with full written reasons for the decision. An application for permission must identify the alleged error(s) in the decision and state the result the party making the application is seeking.