[2010] UKFTT 74 (TC)

TC00387

VAT – FLAT RATE SCHEME – Retrospective withdrawal of authorisation – associated with another company – whether Appellant and another company closely bound to one another by financial, economic and organisational links – satisfied that Respondents’ decision reasonable – assessment reasonable – Appeal dismissed

FIRST-TIER TRIBUNAL 
TAX

	R D F MANAGEMENT SERVICES LIMITED	Appellant

	- and -

	THE COMMISSIONERS FOR HER 
	MAJESTY’S REVENUE and CUSTOMS	Respondents

Tribunal:	John N. Dent (Judge)
Rayna Dean FCA (Member)	  

Sitting in public in Manchester on 16 December 2009

David Sutton, Chartered Accountant, for the Appellant 

Julian Winkley, advocate for HM Revenue & Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

The Appeal

1.	The Appellant was appealing against the Respondents’ decision dated 11 June 2008 withdrawing authorisation to use the flat rate scheme from the company’s date of registration, 5 October 2007.  As a result of this decision on 11 June 2008 the Respondents issued an assessment increasing the Appellant’s 01/08 VAT liability to £29,925, and invited the appellant to provide input tax details for 04/08 so that a correct assessment could be issued. The Respondent issued a misdeclaration penalty dated 20 October 2008 in the sum of £4,095. This, too, was appealed.
2.	The Appellant asked for reconsideration of the decision, and complained about HMRC’s handling of the matter. This took until 13 March 2009.
3.	The Appellant’s Notice of Appeal was dated 27 March 2009. 
4.	The Appellant’s grounds of appeal were as follows:
(1)	The assessment(s)
HMRC claim that the company is precluded from using the VAT Flat rate Scheme on 2 counts:
- they trade with an 'associated company'. We believe that on the guidance contained in HMRC Notice 733, and specifically paras 3.9 and 3.10, contain nothing to support that view.
- they have exceeded the turnover threshold. We believe that HMRC have cynically manufactured a situation to make sure turnover exceeds the threshold so that they do not have to argue the ‘associated’ company point. They have done this by claiming that an invoice issued incorrectly and later cancelled (and for which the original recipient returned the VAT originally claimed) was somehow a ‘Crown Debt’ and therefore needs to be included in turnover.
(2)	The penalty
The legislation allows penalties to be waived where there is reasonable excuse for a ‘misdeclaration’.
Our contention is that even if the tribunal finds that our client is ineligible to use the Flat rate Scheme, our clients still had a. reasonable excuse or excuses for using it (and hence for any misdeclaration) because:
- the guidance in HMRC Notice 733 (paras 3.9 and 3.10) re whether or not a company which trades with an associate can use it is extremely ambiguous, but nevertheless appears to allow it, and
- HMRC's cynical use of the Crown Debt assessment is nothing other than an abuse of the VAT officers power to help ensure that his judgement re use of the FRS cannot be challenged
- when we asked for a reconsideration from Mrs Marie Sharman, even she, as an officer of HMRC, needed to obtain advice from her policy's team on the matter. It therefore follows that a ‘reasonably conscientious business man’ would have a reasonable excuse for misinterpreting the written guidance available.
The Issues in Dispute
5.	The Appellant provided management services to a company called “Bored Bar Engineering Limited (“BBE”). The Respondents contended that the Appellant was associated with BBE, and, therefore, ineligible to join the flat rate scheme.  The Respondents backdated their decision to withdraw the Appellant from the scheme to the date of its admission, which was on 5 October 2007.  The Appellant submitted that it was an independent and separate company from BBE.  Further the companies were not closely bound to one another by financial, economic and organisational links.  The Appellant challenged whether the Respondents had cynically used the “Crown Debt Scheme” to enable the decision to  withdraw the Appellant from the Flat Rate Scheme to be made.
6.	The Appellant submitted that, even if the tribunal finds that our client is ineligible to use the Flat Rate Scheme, they still had a. reasonable excuse or excuses for using it (and hence for any misdeclaration).
7.	Under section 84(4ZA) of VATA 1994 our powers on Appeal  are limited to considering the reasonableness of the Respondents’ decision to withdraw the Appellant from the flat rate scheme backdated to the date of admission.  We are not permitted to substitute our own judgment for that of the Respondents.  The issue for the Tribunal was whether the Respondents’ decisions to withdraw and backdate 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 must not have taken into consideration irrelevant matters.  
The Law
8.	The flat rate scheme was introduced with effect from 24 April 2002.   The scheme is 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 applied to join the scheme.
9.	The legislative authority for the scheme is section 26B of VATA 1994 which enables the Respondents to make regulations dealing with the operation of the scheme.   The relevant regulations are 55A to 55V of the VAT Regulations 1995.  The Respondents have issued VAT Notice 733 which gives practical guidance on the workings of the scheme. Certain parts of VAT Notice 733 have force of law as tertiary legislation.
10.	The relevant regulations or parts of them for this Appeal are:
Regulation 55A(2) provides
For the purposes of this Part of the regulations (our italics), a person is associated with another person at any time if that other person makes supplies in the course or furtherance of a business carried on by him, and
(a)	the business of one is under the dominant influence of the other, or
(b)	the persons are closely bound to one another by financial, economic and organisational links.
Regulation 55L (Admission to Scheme) provides
(1)	A taxable person shall be eligible to be authorised to account for VAT in accordance with the scheme at any time if –
(d) he is not, and has not been within the past 24 months -
(iii) associated with  another person
Regulation 55M (Withdrawal from the scheme) provides
(1) Subject to paragraph (2) below, a flat rate trader ceases to be eligible to be authorised to account for VAT in accordance with the scheme where -
(f) he becomes –
(iii) associated with another person
(h) his authorisation is terminated in accordance with regulation 55P below.
Regulation 55P (Termination by the Commissioners) provides
The Commissioners may terminate the authorisation of a flat rate trader at any time if
(a)	they consider it necessary to do so for the protection of the revenue
(b)	a false statement was made by, or on behalf of, him in relation to his application for authorisation.
Regulation 55Q (Date of withdrawal from the scheme) provides
(1)	The date on which a flat rate trader ceases to be authorised to account for VAT in accordance with the scheme shall be
(c)	where regulation 55M (1)(c), (d) or (f) applies, the date the event occurred.
(f) where regulation 55M(1)(h) applies, the date of issue of a notice of termination by the Commissioners or such earlier or later date as may be directed in the notification.  

11.	Section 83(fza) of VATA 1994 gives the taxpayer a right of appeal to the Tribunal in respect of a decision of the Commissioners refusing or withdrawing authorisation to use the flat rate scheme.   Under Section 84(4ZA) of VATA 1994 the Tribunal’s jurisdiction on such appeals is limited to examining the reasonableness of the Commissioners’ decision.  Section 84(4ZA) provides
“Where an appeal is brought –
(a) against such a decision as is mentioned in section 83(fza), or
(b) to the extent that is based on such a decision, against an assessment,
the tribunal shall not allow the appeal unless it considers that the Commissioners could not reasonably have been satisfied that there were grounds for the decision.”
The Evidence
12.	We heard evidence from Mr David Sutton, a Chartered Accountant, for the Appellant.  Mr William Day, an assurance officer, gave evidence for the Respondents.  A bundle of documents was supplied at the hearing.
Background
13.	As part of a pre-credibility check against the Appellant's VAT return, a referral was
made  to  Mr Day  to  make further enquiries  on  the  basis  of concerns  regarding  potential associated companies and the use by the Appellant of the Flat Rate Scheme (FRS).
14.	On 27 March 2008 he wrote to the Appellant requesting a meeting under a procedure known as PN160. He produced this letter as exhibit WD1. Procedure PN160 is adopted where HMRC suspects dishonest conduct has occurred within the trader’s accounting for indirect tax. The procedure includes notifying the Appellant of their rights, confirming personal details and notifying them of the 'subject of the enquiry'. The subject of the enquiry with the trader was that HMRC suspected under-declarations of VAT for the period between 20/09/2007 to 31/01/2008. The Appellant was advised that they may wish to consider the following before responding to Mr Day’s letter:
•	Transactions with   Bored   Bar   Engineering   Ltd   (BBE)   (the Appellant's customer); and
•	Use of the 'Flat Rate Scheme for Small Businesses'.

15.	A series of correspondence then ensued between Mr Day and the Appellant's
representative, Mr Sutton of Sutton McGrath Ltd. Within that correspondence Mr Sutton
detailed two errors on the Appellant's VAT account:
•	Firstly an invoice from the Appellant to BBE dated 20/09/2007 (with VAT of £12,744.90) was purportedly raised in error by a director of BBE. The
nature of the error being that the date of the invoice was before the
Appellant's date of VAT registration; and
•	The second error related to an under declaration of VAT due to 'cash
accounting rules'.

Mr Sutton told Mr Day that the director of BBE had prepared the Appellant's invoice as the Appellant did not have the means to prepare an invoice. Mr. Sutton stated that the supply to which the management charge related was that of ‘shop floor/production management’. Mr Day produced this series of correspondence as exhibit WD 2.

16.	Whilst conducting his checks Mr Day became aware that the Appellant's customer, BBE was associated with C I L Steeltech Ltd (CIL). On 16 April 2008, he wrote to CIL requesting details of its transactions regarding management charges with BBE. In reply he became aware that Mr Gee was a director in both BBE and CIL. He concluded, from the correspondence that both BBE and CIL account for VAT on the basis of the date of the invoice and do not use the FRS. Within this series of correspondence is a fax (undated but referring to BBE's VAT period ending 31/12/2007) from Mr Gee of BBE to HMRC. The detail within the fax stated that the management charges from CIL and the Appellant related to various expenses and profit extraction. Mr Day produced this series of correspondence as exhibit WD 3.
17.	On 07 May 2008 Mr Day received a letter from Sutton McGrath Ltd within which copies of the Appellant's invoices, control accounts and bank statements were enclosed. He produced this letter and attached information as exhibit WD 4.
18.	On 16 May 2008, together with Officer Kay, Mr Day attended a meeting at the trading premises of BBE. On concluding the interview he noted, amongst other things, that in respect of the management charges from both the Appellant and from CIL to BBE, there were no timesheets or records of resources provided and that the Appellant's charges were the same as those invoiced by CIL. He also noted that Mr Sutton had recommended use of the
FRS by the Appellant. He produced a record of this meeting as exhibit WD 5.
19.	Further to the meeting, in correspondence, Mr Gee, as director of BBE, confirmed
that BBE's premises were 60% owned by Mr Gee's self administered pension fund with the other 40% being jointly owned by the Appellant's two directors. He also confirmed that BBE paid the Appellant's directors rent of £1,000 per month. Mr Day produced this correspondence as exhibit WD 6.
20.	With regards to the charge of VAT in the sum of £12,744.90, on the invoice dated
prior to the Appellant's date of registration BBE repaid such VAT to HMRC. On 11 June 2008 Mr Day wrote to BBE concerning the said payment of VAT and confirmed that HMRC had, on this occasion, granted permission to allow BBE to reclaim such VAT and took steps to refund BBE with this amount. Mr Day produced this letter as exhibit WD 7.
21.	On 11 June 2008 Mr Day wrote to the Appellant regarding an amount £12,744.90 deemed to be a debt to the Crown. This letter requested repayment of this amount.  He produced this letter as exhibit WD 8.
22.	On 11 June 2008 Mr Day wrote to the Appellant and advised them of his intention to raise an assessment and of his decision not to continue with PN160 procedure. This letter detailed his decision that on the basis of financial, economic and organizational links, the Appellant was not eligible to use the FRS. He produced this letter as exhibit WD 9.
23.	On 24 June 2008, Mr Day received email correspondence from Sutton McGrath Ltd, requesting that he review his conclusions in respect of both his decision regarding the Appellant's ineligibility to  use the   FRS  and  the  decision  to  issue  the  Notice  of the  Debt to the  Crown.   In reconsideration he confirmed in writing both decisions remained in full force. He produced this correspondence as exhibit WD 10.
24.	On receipt of the Appellant's request for a further review of his decisions he referred
the request to his manager who advised him that he had reconsidered his decision and concluded that my decisions were correct. Mr Day produced his manager’s reply dated 23 July 2008 as exhibit WD 11.
25.	On 24 July 2008, Mr Day wrote to the Appellant, advising them of the review and
providing formal assessment notification.  He produced this letter and form 641 (Officer's Assessment) as exhibit WD 12.
26.	Between 28 July 2008 and 25 September 2008 there was an exchange of emails between Mr Day and Mr Sutton. The correspondence covered the Appellant's intention in using the Cash accounting as well as a request for a further review. Mr Sutton wrote on 02 October 2008 enclosing payment of £8,258.67. Mr Day responded on 09 September 2008 acknowledging receipt of the Appellant's payment and advising that the case had been passed for a further review. Mr Day produced this correspondence as exhibit WD 13.
27.	The Appellant's request for a further review was forwarded to an independent
Review Officer who confirmed that the Appellant could apply to join the Cash accounting Scheme on a retrospective basis. In addition the earlier decisions were upheld in full. Mr Day produced this letter as exhibit WD 14.
28.	By letter dated 23 October 2008 Mr Sutton requested a reconsideration of HMRC's
imposition of a misdeclaration penalty, explaining that the Appellant had a reasonable
excuse on the grounds that they acted as a reasonably conscientious businessman.  Mr Day responded   referring   Mr Sutton to Public Notice 700/42 (Misdeclaration   Penalty) and
highlighted that inability to pay, reliance on others, genuine mistakes, honesty and acting in
good faith are not accepted as reasonable excuses. He produced this series of correspondence
as exhibit WD 15.
29.	On 24 October 2008 Mr Day wrote to the Appellant notifying them of a further assessment relating to over declared VAT in VAT period ending 07/08.   He produced this letter and assessment as exhibit WD 16.
30.	On 20 October 2008 a misdeclaration penalty was also issued in the sum of £4,095.00.   This penalty was subsequently mitigated by 10 per cent to reflect the amount of co-operation provided by the Appellant.
Mr Day’s decision of 11 June 2008
31.	Mr Day decided that the Appellant was not eligible to use the flat rate scheme because of its association with BBE.  He, therefore, withdrew the Appellant’s authorisation to use the flat rate scheme.  Mr Day considered that the Appellant had close financial, economic and organisational links with BBE.
32.	Mr Day relied on the following facts in reaching his decision to withdraw authorisation:
(1)	Financial Links:
a.	The directors of RDF are shareholders of BBE. (25% of BBE shares are held by Mr Clay, and 25% by Mrs Clay (both also being directors of RDF).
b.	RDF's charges are dependent on what directors of BBE decide it should get. BBE's directors consider what is reasonable depending on the economic viability of BBE. This is backed up by the fact that no written contract exists between BBE and RDF, there is no record of the time or resources used by RDF re supplies to BBE, charges are not based on the quality or quantity of work done by RDF, both RDF and another company (both having directors in common with BBE) have raised invoices for identical amounts although each supplies different services to BBE.
c.	The charges do not, therefore, appear to be based upon commercial reality (ie BBE and RDF do not have a normal business relationship).
d.	Fees to BBE are RDF's sole source of income at present.
e.	BBE premises at New Street are owned by both BBE's director's pension fund (which is partly for the benefit of Mr Clay as a director of BBE as well as RDF) and by RDF's directors.
f.	RDF's directors (Mr & Mrs Clay) receive rental income from BBE for use of the property
(2)	Economic Links:
a.	Economic links include activities where the activities of one party are ultimately for the benefit of another.
b.	BBE benefit by RDF providing the expertise to run the production shop.
c.	BBE also benefit by RDF's willingness to only charge fees as and when agreed with BBE, and the extended credit granted in respect of invoices raised.
d.	RDF benefit from BBE by it supplying it with its sole source of income i.e. the economic viability of RDF is dependent on that of BBE.
e.	Mr Clay of RDF stated he is also hoping to expand the work of RDF through the contacts he makes through BBE and the queries he receives at BBE.
(3)	Organisational Links:
a.	Deodata Clay - Company Secretary and director of RDF from 4/9/07
b.	Deodata Clay - Co Sec and director of BBE prior to 30/10/91 
c.	Roy Clay - director RDF from 4/09/07 
d.	Roy Clay - director of BBE from pre 30/10/91 
e.	There is, therefore common directorship between BBE and RDF. 
f.	Shareholding in BBE is 50% Mr Gee (BBE), 25% Mr Clay (RDF), 25% Mrs Clay (RDF).
g.	Mr Clay is actively involved in the day to day running of both RDF and BBE. Within RDF he is an active director, and within BBE he runs the production shop - BBE relies on his expertise to review orders received, quote for jobs, deciding which jobs will be undertaken, what to charge, what to buy to meet orders, and the overseeing production/supplies. Consequently Mr Clay has a significant role in how BBE and RDF works, and strongly influences the work undertaken by both.

33.	Mr Day considered that the association between the two companies existed on 5 October 2007 when the Appellant was first authorised to use the flat rate scheme.  He decided that the Appellant was never eligible to operate the flat rate scheme.  In those circumstances Mr Day applied the Respondents’ policy as set out in paragraph 8.4 of Public Notice 733 Flat Rate Scheme for Small Businesses which was to backdate the withdrawal of the Appellant’s authorisation to the date when it first used the flat rate scheme, namely 5 October 2007.  
34.	The Commissioners directed that the Appellant was never eligible to use the Flat Rate Scheme and that withdrawal of eligibility was to be with effect from the date of registration viz 5 October 2007. Although the decision letter refers to Regulations 55A to 55V, and  clearly mimics Regulation 55A (2) (b) it is not prescriptive as to powers relating to withdrawal and termination, which are found in Regulations 55M, 55P and 55Q.   
35.	 Mr Day calculated the assessment for unpaid VAT from the Appellant’s VAT records.  He did not apply the Cash Accounting Scheme as it was not possible to back date applications to the Cash Accounting Scheme (Public Notice 731 paragraph 2.1 was cited). He raised an assessment, increasing the VAT liability for 01/08 to £29,925. He invited the Appellant to provide input tax details for the periods 01/08 and 04/08, along with lists of invoices. He indicated that he intended assessing RDF for the correct output tax less any input tax claimed less the original liability of £9,689.49. 
36.	It was accepted by the parties that there was no dispute on quantum
The Appellant’s Evidence
37.	Mr Sutton explained that Mr Gee, the director of the other companies involved, appointed the accountants for those companies. He did not act for them.  
38.	There had been some disputes between the Clay and Gee families. Both had interests in BBE. Both families had agreed to provide services to BBE via the medium of their own wholly owned companies. CIL Management, a company owned by Mr Gee had existed for some years. It had then been decided to form RDF, so that there would be equality of payment. In practice, all payments made were identical. The amount was negotiated, but there was an expectation that payments would be equal in amount. When the service companies were set up, large fees had been paid. Now, a fixed fee is paid. It was agreed that if BBE made profits, larger fees would be payable. RDF had been set up to mirror what CIL was doing. Mr Sutton did not think that CIL operated a Flat Rate Scheme. He asserted that there was no dominant influence.
39.	Financial Links
(1)	So far as Financial links were concerned, Mr Sutton suggested that this meant that one company extended credit to the other, and that the company could not trade without that credit.
(2)	The Appellant did not supply services elsewhere. When invoices were raised by the Appellant, some were not paid straight away. The amount paid was relative to profits made by BBE. 
(3)	Payment was made to both companies at the same time.
(4)	The Appellant was in a position to look for other business. Mr Sutton accepted that, without supplying services to BBE, RDF would not be trading but that it could exist whilst it looked for alternative customers
40.	Economic Links
(1)	The Pension Fund was only linked by directorship
(2)	The Appellant was never dependent on BBE.
41.	Organisational Links
(1)	Staff were common to both companies, but the links were not sufficient to make it dependent
(2)	Mr Sutton suggested that “bound to one another” should be read as meaning “dependent on one another”.
42.	Penalty.
43.	Mr Sutton suggested that the penalty should not have been imposed. The Appellant had acted as a reasonably conscientious businessman should have acted. The Appellant had sought advice on eligibility for the Flat Rate Scheme. Mr Sutton himself had suggested to the Appellant that it should register for the Scheme, because it could save VAT.
44.	So far as the size of penalty was concerned, the Appellant would have expected a large amount of mitigation. It had not been dishonest, and had provided all the information required from the outset. There had been no “hedging around”.
45.	Mr Sutton raised the question of the issuing of the invoice by HMRC as a debt due to the Crown. He asserted that in 99 per cent of cases, HMRC would have disallowed it. However, in this case they had allowed BBE to claim it and assessed it on the Appellant. This had been done by HMRC so there would be no need to raise linkage. This was a cynical manipulation by HMRC.
Reasons for Our Decision
46.	Our jurisdiction in this Appeal is limited to considering the reasonableness of the Respondents’ decision to withdraw the Appellant from the flat rate scheme backdated to the date of admission.  We are not permitted to substitute our own judgment for that of the Respondents.  Mr Day’s decision of 11 June 2008 comprised four elements which were sequentially dependent upon each other, namely:
(1)	Whether the Appellant was associated with BBE Limited in that they were closely bound to one another by financial, economic and organisational links?
(2)	Whether Mr Day’s decision to withdraw the Appellant from the flat rate scheme with effect from date of admission was reasonable in the sense that he had regard to relevant matters and disregarded irrelevant matters?
(3)	Whether there were reasonable grounds for raising an assessment for unpaid VAT against the Appellant, and if so the correctness of the assessment?
(4)	Whether the legal requirements for issuing a misdeclaration penalty were met, and if so whether there were grounds for finding a reasonable excuse or mitigating the penalty?
Whether the Appellant was associated with BBE?
47.	Mr Sutton contended that the Appellant was a separate legal entity.  In Mr Sutton’s view the Appellant was not closely bound to BBE by financial, economic and organisational links.  The Respondents, on the other hand, submitted that Mr Day gave clear cogent evidence of the close links between the two companies.  His finding that the Appellant was associated with BBE was reasonably arrived at.
48.	Under our limited jurisdiction of  section 84(4ZA) of VATA 1994 we are required to examine anew the relevant facts and circumstances of the Appeal in order to decide the reasonableness of the Respondent’s decision about the  weight  given to relevant and irrelevant considerations.  We make the following findings of fact:
(1)	The directors of RDF are shareholders of BBE. (25% of BBE shares are held by Mr Clay, and 25% by Mrs Clay (both also being directors of RDF).
(2)	RDF's charges are dependent on what directors of BBE decide it should get. BBE's directors consider what is reasonable depending on the economic viability of BBE. This is backed up by the fact that no written contract exists between BBE and RDF, there is no record of the time or resources used by RDF re supplies to BBE, charges are not based on the quality or quantity of work done by RDF, both RDF and another company (both having directors in common with BBE) have raised invoices for identical amounts although each supplies different services to BBE. When invoices were raised by the Appellant, some were not paid straight away. The amount paid was relative to profits made by BBE.
(3)	Fees to BBE are RDF's sole source of income at present. The financial survival of the Appellant as an active company was dependent upon payment being made to it by BBE.
(4)	Payment was made to both companies, RDF and CIL, at the same time, and payments were sometimes delayed to await BBE being in a position to pay
(5)	Fees to BBE are RDF's sole source of income at present
(6)	Mr Clay is actively involved in the day to day running of both RDF and BBE. Within RDF he is an active director, and within BBE he is a director and runs the production shop - BBE relies on his expertise to review orders received, quote for jobs, deciding which jobs will be undertaken, what to charge, what to buy to meet orders, and the overseeing production/supplies. Consequently Mr Clay has a significant role in how BBE and RDF works, and strongly influences the work undertaken by both.
(7)	The Appellant company was set up to equalise withdrawal of funds from BBE by the Gee and Clay families. The amount received by each was not dependent on the amount of work done, but negotiated from time to time, depending on the profitability of BBE.
49.	Our findings of fact confirm Mr Day’s conclusion that the Appellant was associated with BBE. The findings establish that there were close organisational links between the companies in that they had the same shareholders with Mr Clay playing a significant strategic and operational role in both companies.  The close financial links were evidenced by the financial dependency of the Appellant upon BBE. BBE supplied the only income of the Appellant.  The companies shared close economic links, securing mutual benefits from their association.  The financial support of BBE enabled the Appellant to continue in business. 
50.	We hold that the Appellant and BBE were closely bound by financial, economic and organisational links.  Based on our findings we are satisfied  that Mr Day took account of relevant matters in arriving at his decision that the Appellant was associated with BBE and disregarded irrelevant matters.  We, therefore, find that his decision regarding the Appellant’s association with BBE was reasonable.
Decision to withdraw authorisation with effect from date of admission
51.	Mr Day formed the view that the Appellant was never entitled to use the flat rate scheme.  The Appellant’s association with BBE existed on 5 October 2007, the date of its admission to the scheme.  In those circumstances Mr Day was obliged to withdraw the authorisation from the Appellant to use the scheme since “association with another person” was a legal bar to joining the scheme.  Mr Day then applied his discretion to backdate the withdrawal to the date of the Appellant’s admission to the scheme, namely 5 October 2007.  The act of backdating gave rise to the assessment for VAT.  
52.	We considered whether the Respondents had the legal authority to backdate their decision to withdraw the Appellant from the flat rate scheme.  
53.	We consider that regulations 55P and 55Q(f) provide the Respondents with the authority to withdraw retrospectively authorisation from the Appellant to use the flat rate scheme.  
54.	We consider that in the circumstances of this Appeal the Respondents were entitled under regulation 55P(a) to terminate the Appellant’s authorisation.  The fact that from the outset the Appellant was ineligible to use the flat rate scheme provided sufficient justification for the Respondents to invoke their powers under regulation 55P(a) for the protection of the revenue.  Under regulation 55Q(f) the Respondents had the discretion to backdate the termination.
55.	 We found that Mr Day had regard to relevant matters and disregarded irrelevant matters when making his decision to withdraw authorisation with effect from 5 October 2007.  We, therefore, hold that Mr Day’s decision to withdraw authorisation with effect from 5 October 2007 was reasonable.  
The Reasonableness of the Assessment
56.	The effect of withdrawing authorisation with effect from 5 October 2007 was that the Appellant was required to account for VAT under normal accounting from that date.  Applying normal VAT accounting Mr Day concluded that the Appellant had under declared its VAT liability for the periods from 5 October 2007. The quantum of the assessment was not in issue. In those circumstances we are satisfied that Mr Day’s assessment was reasonable and not arbitrary as to the amount of tax due.
57.	We had regard to the submission by Mr Sutton that the issuing of the invoice by HMRC as a debt due to the Crown was a cynical manipulation by the Respondents. He asserted that in 99 per cent of cases, HMRC would have disallowed it. However, in this case they had allowed BBE to claim it and assessed it on the Appellant. We looked at the letter from Mr Kerr for the Respondents dated 23 July 2008 at P 86 of the Main Bundle. This explained as follows:
“There is no doubt that on 20th September 2007, the date shown on the invoice from RDF to Bored Bar Engineering Ltd (BBE) for management charges, RDF was not registered for VAT and had no entitlement to charge VAT because the company at that time was not an 'authorised person'.
The amount of £12744.90 shown on this invoice is therefore not VAT, and in circumstances such as these where HMRC wish to recover monies incorrectly charged as VAT, it cannot be done so under the normal assessment rules.
In this case, and in line with Departmental guidelines to recover the amount shown as VAT from the supplier of the invoice rather than the recipient, Mr Day has decided to allow BBE to treat the amount as if it were input tax (Extra Statutory Concession Number 15) and to recover the amount from RDF.”

58.	We found that the Respondents had acted in accordance with the law, and there had been no “cynical manipulation”.
Misdeclaration Penalty
59.	The size of the Appellant’s under declaration of VAT caused a breach of section 63 of VATA 1994 giving rise to a misdeclaration penalty of £4,095.  HMRC mitigated the penalty by 10 per cent to reflect the amount of co-operation provided by the Appellant with their enquiries, which resulted in a penalty of £3,685.50.  Mr Sutton on behalf of the Appellant contended that the penalty should not be applied, or if it should be applied, was excessive. Reference was made at the hearing to the decision in Welshback Exercise Limited (LON 20310). We considered that this case was remarkably similar to the matter before us. In that case a mitigation of 25 per cent was allowed, because of cooperation by the taxpayer. We found that a similar mitigation of the penalty could be allowed in this appeal, because of cooperation by the Appellant. We, therefore, allow a misdeclaration penalty in the sum of £3071.25.  
Decision
60.	For the reasons set out above we find that Mr Day’s decision to withdraw the Appellant’s authorisation to use the flat rate scheme for the VAT periods from 5 October was reasonable.  Further we uphold the assessment for unpaid VAT in the sum of £17,546.00 and a misdeclaration penalty in the sum of £3071.25.  We, therefore, with the exception of the variation of the amount of the penalty, dismiss the Appeal.  We make no order for costs.

JOHN N DENT
JUDGE
Release Date: 16 February 2010