[2010] UKFTT 21 (TC)

TC00336

Appeal number:  TC/09/10845

VAT:  flat rate scheme – Application to backdate change in trade classification refuse – Appeal dismissed.

FIRST-TIER TRIBUNAL

TAX 

	ARCHIBALD & CO LTD	Appellants

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (VAT)	Respondents

			TRIBUNAL JUDGE: 	JOHN M BARTON, WS 
			(Member):			MRS EILEEN A SUMPTER, WS

Sitting in public in Edinburgh on Wednesday 25 November 2009

Catharine Archibald, for the Appellants

Kevin Clancy, Shepherd & Wedderburn, instructed by the General Counsel and Solicitor to HM Revenue and Customs for the Respondents

© CROWN COPYRIGHT 2009

DECISION

Preliminary 

1.	The Appeal was heard on 25 November 2009.  The Appellants were represented by Catharine Archibald, a Director of the Appellants (“Mrs Archibald”).  She was accompanied by Dugald Carstairs.  The Respondents (“HMRC”) were represented by Kevin Clancy of Messrs Shepherd & Wedderburn.
2.	The subject matter of the Appeal was HMRC’s refusal to backdate a change in the category of the Appellants’ business under the flat rate scheme.
3.	The question before the Tribunal was to determine whether there were reasonable grounds for that decision. 
4.	Section 26B of the Value Added Tax Act 1994 (“VATA”) provides:
“(1) The Commissioners (HMRC) may by regulations make provision under which, where a taxable person so elects, the amount of his liability to VAT in respect of his relevant supplies in any prescribed accounting period shall be the appropriate percentage of his relevant turnover for that period.
...................................................................
(6) The regulations may
(a) provide for the appropriate percentage to be determined by reference to the category of business that a person is expected, on reasonable grounds, to carry on in a particular period.”
5.	Regulation 55H of the Value Added Tax Regulations 1995 (“1995 Regulations”) provides: 
“(1) The appropriate percentage to be applied by a flat-rate trader for any prescribed accounting period, or part of a prescribed accounting period (as the case may be), shall be determined in accordance with this regulation and regulations 55JB and 55K.       
(2) For any prescribed accounting period
(a) beginning with a relevant date, the appropriate percentage shall be that specified in the Table for the category of business that he is expected, at the relevant date, on reasonable grounds, to carry on in that period.”
6.	Regulation 55K of the 1995 Regulations provides:
“(1) Where, at a relevant date, a flat-rate trader is expected, on reasonable grounds, to carry on business in more than one category in the period concerned, paragraph (3) below shall apply.
……………………………………..
(3) He shall be regarded as being expected, on reasonable grounds, to carry on that category of business which is expected, on reasonable grounds, to be his main business activity in that period.”
The categories of business set out in Regulation 55K include
Accountancy or book-keeping
Business services not listed elsewhere
7.	Section 83 of VATA provides:
“(1) Subject to sections 83G and 84, an appeal shall lie to the tribunals with respect to any of the following matters ……………………..
(fza) a decision of [HMRC].........................................................
(ii) as to the appropriate percentage or percentages (within the meaning of that section) applicable in a person's case”
8.	Section 84 of VATA provides:
“(4ZA) Where an appeal is brought
(a), against such a decision as is mentioned in [section 83(1)(fza)], or
(b) to the extent that it is based on such a decision, against an assessment,
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.”
9.	The following documents were produced –
Application for Registration, submitted 28 November 2006.
Examples of engagement letters sent by the Appellants in 2006 and 2007.
Record of telephone calls made on 12 January and 23 March 2007.
Application to join the flat rate scheme dated 23 March 2007.
Acknowledgement and approval dated 10 May 2007.
Correspondence and e-mails between 26 February and 22 July 2009 including disputed decision dated 16 April 2009 and review decision dated 14 May 2009.
Extract from Appellants’ website.
VAT Notice 733 Flat rate scheme for small businesses, February 2004 and March 2007 editions.
Flat Rate Scheme Guidance Manual, January 2008.

10.	Mrs Archibald gave evidence on behalf the Appellants.  Helen Cox, an Officer of HM Revenue and Customs, gave evidence for HMRC.
Material Facts

11.	The material facts are as follows –
(1)	The Appellants are a company incorporated under the Companies Acts, promoting the services of Mrs Archibald.  Mrs Archibald had qualified as a chartered accountant in 1994, and for 15 years prior to 2006, she had been employed by PricewaterhouseCoopers, latterly as senior tax manager heading up the Edinburgh investment management tax team.
(2)	On 28 November 2006, Mrs Archibald, in her capacity as a Director, made an application for the Appellants to be registered for VAT.  In the application form, the Appellants’ current and/or intended business activities were described as “Corporation tax services” and were categorised as “Accountancy”.  The Appellants have been registered for VAT since 21 November 2006.  
(3)	On 12 January 2007, Mrs Archibald telephoned HMRC’s Contact Centre, enquiring about the flat rate scheme.  She asked which rate would be appropriate to her trade sector.  She was advised that it was up to each trader to select a trade sector and that their selection would determine the applicable rate.  She was referred to VAT Notice 733 and told that she could apply online.  Mrs Archibald telephoned the Contact Centre again on 23 March 2007, asking for further details of the scheme. 
(4)	Mrs Archibald made application in the name of the Appellants with effect from 1 March 2007 on the basis that the Appellants’ business was accountancy.  The Appellants were duly registered on that basis.
(5)	On 10 May 2007, HMRC wrote to the Appellants, confirming their entitlement to use the scheme with effect from 1 March 2007.  The letter stated “You must notify Customs if your business changes so that you cease to be eligible for the flat rate scheme, or if your business changes so that it falls within a different flat rate sector.”
(6)	At that time, Mrs Archibald’s book-keeping work was a very limited part of what she did, representing £700 out of net sales of £40,000 in the three months to 31 May 2007.
(7)	After 31 May 2007, Mrs Archibald did not undertake any book-keeping work.  98% of her work was engaged in providing tax advice to investment funds and management companies, with the balance in marking examination papers. 
(8)	On 26 February 2009 Mrs Archibald emailed HMRC, notifying them that in hindsight she should have selected “business services not listed elsewhere” as the Appellants’ trade sector, since she had not undertaken any accountancy or book-keeping work since April 2007 and only a very small amount in the quarter to May 31 2007.  She asked whether she could go back and recalculate her VAT using the lower rate applicable to “business services not listed elsewhere”.  She followed this up by letter dated 26 March 2009, attaching a schedule showing her calculation that she had overpaid VAT by £7,575.76.  This correspondence was forwarded to the Flat Rate Scheme Registration Unit, to amend her registration with prospective effect.
(9)	On 14 April 2009 HMRC replied, referring Mrs Archibald to VAT Notice 733 (March 2007 issue).
“4.2 What if I get the sector wrong?

We will not normally check your choice of sector when we process your application.  So if you have made a mistake you may pay too much tax or too little.  Paying too little could mean that you are faced with an unexpected VAT bill at a later date.
However, if we approve you to join the scheme, we will not change your choice of sector retrospectively as long as your choice was reasonable.  It will be sensible to keep a record of why you chose your sector in case you need to show us that your choice was reasonable.”

(10)	On 16 April 2009, HMRC wrote to the Appellants, refusing to backdate the change in classification, on the basis that as the selection of trade sector was up to the trader, it was the policy of HMRC not to backdate changes.
(11)	On 4 May 2009, the Appellants wrote to HMRC asking to have that decision reviewed.
(12)	On 14 May 2009, Miss Cox issued the decision under appeal - refusing to allow backdating and citing Regulation 55H(2) of the 1995 Regulations.
Submissions

12.	The following decisions were referred to in the course of the hearing -
Mr & Mrs Pollitt v Commissioners of Customs and Excise VAT
Decisions/4000-4499/4463 
Ken Reid Ltd v HMRC V20494
HMRC v David Burke [2009] EWHC 2587 (Ch)

13.	The Appellants’ case, as disclosed in the notice of appeal, was that: 
The company paid VAT at the wrong rate under the flat rate scheme due to an incorrect trade classification.  The trade classification used was "accountancy” when it should have been “business services not listed elsewhere”.  The incorrect VAT rate was applied from 1 March 2007 (the date of joining the flat rate scheme) to 30 November 2008.

Mrs Archibald added:

I am the sole practitioner in the company and I am a chartered accountant by qualification but the company does not provide “accountancy” services.  At the time the company registered under the flat rate scheme there was no intention to provide accountancy services.  I market my company as providing tax services to the investment management industry and that is all I intended to do at the point I registered under the flat rate scheme.  Therefore the trade classification “accountancy” was incorrect as it was not the “category of business that…[the company] ….expected, at ... [the] start date, on reasonable grounds to carry on in that period” (Regulation 55H(2) of the 1995 Regulations).

14.	In addressing the Tribunal, Mrs Archibald referred to the legislation and submitted that when she entered into the flat rate scheme, she intended only to provide tax advisory services.  She further submitted that the decision of HMRC was arbitrary, and she compared her situation with that recorded in paragraph 3 in the case of Ken Reid Ltd v HMRC where HMRC had exercised their discretion to withdraw an assessment.  Mrs Archibald pointed out with reference to Regulation 34 of the 1995 Regulations that a taxpayer has up to three years to correct any error.  Mrs Archibald also pointed to the failure of HMRC to advise her regarding the appropriate trade sector when she telephoned on 12 January 2007.
15.	In their Statement of Case, HMRC contended that:
The Appellants were admitted to the flat rate scheme on the basis of Mrs Archibald’s selection of the category “accountancy”, which was not unreasonable.  HMRC had no reason to query that selection, which was the free choice of the Appellants.
There is no provision within the flat rate scheme for retrospective amendment by HMRC of the Appellants’ business category, provided that the Appellants’ selection was reasonable, which it was in this case.
HMRC’s decision was correct and reasonable in all the circumstances and the appeal should therefore be dismissed.

16.	In addressing the Tribunal, Mr Clancy specifically referred to the provisions of s84 of VATA.  The question to be asked was whether Miss Cox, in reviewing the prior decision, had acted unreasonably.
Reasons

17.	Part of the original appeal related to a claim for a reduced percentage for the first six months that the Appellants were in the flat rate scheme.  This element of the claim was conceded by HMRC prior to the Hearing.
18.	Both Mrs Archibald and Miss Cox provided credible evidence; and there was no dispute regarding the primary facts. 
19.	The flat rate scheme was introduced in order to simplify the operation of VAT for the smaller trader; and a self assessment procedure was established for determining the appropriate trade sector.  It is significant that neither the 1995 Regulations nor the VAT Notice 733 contains any detailed description of the various trades, and it is accordingly a matter of applying the ordinary meaning to each of the descriptions as they appear.
20.	There was a full record of Mrs Archibald’s telephone call to HMRC on 12 January 2007.  It is apparent from the notes of that telephone call that Mrs Archibald had then still not made a decision regarding which trade sector was appropriate for her company.  In the opinion of the Tribunal, there was no duty on HMRC to advise her in this regard.  She had the first hand knowledge of the business which she conducted in the name of the Appellants, and it was a matter of applying the ordinary meaning to each of the descriptions of the various sectors.  There was no suggestion that Mrs Archibald was misled by anything that was said on 12 January 2007 nor in the course of the subsequent conversation on 23 March 2007.  It has therefore to be concluded that she used her best judgement in selecting “accountancy or book-keeping” as the most appropriate trade sector.
21.	Was Mrs Archibald wrong to choose that trade sector?  Did she make a mistake in selecting that sector?  She was undoubtedly financially disadvantaged, in that the alternative sector “business services not listed elsewhere” carries a lower percentage; and this no doubt influenced her in making application in 2009 for a change of sector.  Indeed, HMRC acceded to this application.
22.	The 1995 Regulations contain detailed guidance where a taxpayer may carry on more than one trade within a business, and Mrs Archibald made great efforts to distinguish her activities as a tax adviser from what might be categorised as accountancy or book-keeping.
23.	For the reasons set out above, it is necessary to give the title to each trade descriptor its ordinary meaning.  What therefore do the words “accountancy” and “book-keeping” encompass?  It is traditional for professional accountants to give advice on taxation matters; indeed the subject of taxation would have been an essential element of Mrs Archibald’s training to become a chartered accountant, and prior to 2007, practically all her taxation experience was gained through her employment with a firm closely associated with the accountancy profession.
24.	When Mrs Archibald was selecting what she regarded as the appropriate sector, she was exercising a form of self assessment; and in the opinion of the Tribunal, “accountancy” in its popular meaning, can reasonably include the provision of tax services.  The application to backdate a change in the category of the Appellants’ business has therefore to be considered in the light of a situation where a category was chosen, which was not inappropriate in relation to the trade carried on by Mrs Archibald in the name of the Appellants.  There was therefore not an error on the part of the Appellants which might have entitled them to a review under Regulation 34 of the 1995 Regulations.
25.	In her evidence, Miss Cox gave a clear explanation of the differing circumstances where HMRC reviews the sector which has previously been selected by a trader and makes a determination which is less favourable for that trader.  If the trader had selected a trade sector which was clearly wrong, it is the practice of HMRC to backdate the change in the category in order to recover the tax which ought to have been paid if a proper selection had been made.  On the other hand, it is not the practice for HMRC to insist on backdating a change where the trader had acted not unreasonably in making his original selection.  It was on this analogy that Miss Cox had made the decision not to backdate the change in the category applicable to the Appellants; and in her letter to the Appellants, she had referred to the following explanation set out in the decision Ken Reid Ltd v HMRC 
“8.  The Respondents [HMRC] 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.”
26.	Significantly, s84 of VATA restricts the power of this Tribunal to considering the reasonableness of HMRC’s decision as set out in Miss Cox’s letter of 14 May 2009.  The question for the Tribunal is a narrow one, namely, were there reasonable grounds for the decision contained in the letter of 14 May 2009?  It is therefore not necessary for the Tribunal to determine what was the “correct” trade sector for the Appellants when application was made to enter the flat rate scheme, or indeed whether the revised category is now “correct”.  Section 84 requires the Tribunal to look at all the circumstances which were before Miss Cox, as the decision-maker in this matter, and ask whether in these circumstances, the decision she made was reasonable.
27.	When the application was made to join the flat rate scheme, Mrs Archibald, on behalf of the Appellants, went through a procedure of self assessment in selecting what she regarded as the appropriate sector.  It is apparent from the record of the telephone conversation on 12 January 2007 that she had given the matter some consideration.  Having regard to her background and the wide scope of the work carried out by the accountancy profession, her choice of the “accountancy or book-keeping” sector was not inappropriate.  The legislation relating to the flat rate scheme does not place any obligation on HMRC to backdate any change of category nor is there any provision whereby a taxpayer can insist on having a change backdated.  The question of backdating ordinarily seems to have arisen when the change of category is adverse to the taxpayer’s interest.  In this case, the proposed change was to benefit the Appellants.  In the opinion of the Tribunal, it was open to HMRC to adopt a consistent approach when considering the possibility of backdating a change of category; and it is in this context that the Tribunal finds the decision as set out in the letter of 16 May 2009 to be not unreasonable. 
28.	The appeal is accordingly dismissed.

MR JOHN M BARTON, WS
TRIBUNAL JUDGE

RELEASE DATE:  11 JANUARY 2010