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	United Kingdom VAT & Duties Tribunals Decisions
You are here: BAILII >> Databases >> United Kingdom VAT & Duties Tribunals Decisions >> Burke v Revenue & Customs [2008] UKVAT V20881 (24 November 2008) URL: http://www.bailii.org/uk/cases/UKVAT/2008/V20881.html Cite as: [2008] UKVAT V20881

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20881

VAT ––Flat Rate Scheme- journalist started trading in April 1989- returns for VAT on the standard basis- unaware of Flat rate Scheme- visit by VAT inspector in October 2004- failure by inspector to advise of scheme- flat Rate Scheme backdated subject to 3 year cap- appeal allowed in part

MANCHESTER TRIBUNAL CENTRE

DAVID ERIC BURKE Appellant

- and -

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS Respondents

Tribunal: DAVID S PORTER (Chairman)

MISS SUSAN STOTT (Member)

Sitting in public in Manchester on 1 October 2008

Mr Nigel D Bird of counsel instructed by the acting solicitor for the Commissioners for H M Revenue and Customs, for the Respondents

Mr Burke appearing in person

© CROWN COPYRIGHT 2008
 
DECISION
1. David Eric Burke ("the Appellant") appeals against the refusal by the Respondents in a letter dated 11 February 2008 to allow the Appellant to retrospective entry into the Flat Rate Scheme (the Scheme) provided for in section 26B of the Value Added Tax Act 1994. The Appellant says that he was unaware of the scheme and should have been advised of it on the occasion of a VAT inspection in October 2004. The Respondents say that he had successfully supplied appropriate returns of VAT in the normal way and retrospective entry to the scheme could only be allowed in exceptional circumstances. His circumstances were not exceptional
2. Mr Nigel D Bird of Counsel instructed by the acting solicitor for the Commissioners for H M Revenue and Customs appeared for the Respondents and produced a bundle of documents, a bundle of legislation and authorities and a skeleton argument. The Appellant appeared in person.
3. We were referred to the following cases by Mr Bird.

Alexander and Christine Wadlewski 13340

C J Anderson 20255

The Facts

4. We found the following facts. The Appellant is a journalist who started in business and was registered for VAT from 1 April 1989. He had been completing his VAT returns on a quarterly basis in a satisfactory manner. In April 2002 the Scheme was introduced. The Scheme would have allowed the Appellant to calculate his VAT liability by taking 11% of his gross turnover. It would have eliminated the need for a record of his expenses from which he could reclaim the VAT, and would have simplified his accounting system.
5. Mr Bird told us that the Respondents had taken the following action to advertise the Scheme:

A leaflet would have been sent to the Appellant with his return for the periods falling between December 2002 and May 2003 headed "VAT returns without the headache". A flashing banner advertisement was placed on HMRC website at the time of the introduction of the Scheme. The Appellant told us that he did not complete his returns on the internet at that time

A revised version of the leaflet accompanied the returns between June 2003 and August 2003

A leaflet headed" Simplifying VAT for Small Businesses – Flat Rate Scheme" was enclosed with VAT returns between December 2003 and June 2004. Included in the notes sent out to all traders with their VAT returns were the introduction of Scheme, a reference to the Scheme in December 2003, and a change to the Scheme in January 2004.

The Respondents' business support team frequently raised and discussed the Scheme during the Course of routine telephone conversations.

The Appellant very readily confirmed to the Tribunal that he had seen the brochures referred to. He believed that he was at fault but still maintained that he had been treated unfairly. He was clearly anxious to assure the Tribunal of his honesty, and on the evidence before us there was no reason to doubt his honesty. Under questioning from the Chairman, he agreed that he could not be sure he had seen the leaflets let alone read them but he thought, as a conscientious business man, he perhaps should have. We are satisfied that either way he had not read them. If he had read them he would have made the application he subsequently submitted sooner.

On 18 October 2004 the Appellant was visited by Lisa Wyn Jones from Customs and Excise who inspected his books. He had been told that he was not entitled to claim all his telephone expenses for VAT purpose. Apart from that Ms Jones made no further comments as to his VAT returns and she did not advise him of the Scheme.

6. On 28 December 2007 the Appellant contacted the Respondents National Contact Centre ("NCC"), to enquire about the Scheme Notice 733 was forwarded to him. The Appellant contacted the NCC twice more in January 2008, resulting in his receiving form VAT 662 (the notification of a voluntary disclosure) and he was advised that the Scheme had started in April 2002. On 13 February 2008 the Appellant wrote to the Respondents to say that, at the time of inspection, he ought to have been told by Ms Jones that he was entitled to use the Scheme. As a result of his enquiries and subsequent telephone conversations with the Respondents he sent in a break down of his figures for the period 31 December 2002 to 31 Decembers 2007 and requested a refund of £20,348. Mr Bird accepted that the figure was agreed by the Respondents. Further correspondence passed between the parties and the Appellant supplied accounts for the periods in question showing his net profit. On 8 April 2008 Yvonne Kilford, from the National Registrations Appeals Team, wrote to the Appellant refusing to allow the scheme to operate retrospectively. She indicated that the Scheme had been extensively advertised and that it was the Appellant's responsibility to make himself aware of the information that might be relevant to his business. It would be impossible for visiting officers to cover every aspect of VAT during a visit and furthermore, it is not their remit to offer tax planning advice. As a result she did not consider that the lack of awareness of the Scheme to be an "exceptional circumstance" in order to allow retrospective entry into the Scheme. As the Appellant had referred to the case of Alexander and Christine Wadlewski 13340 she stated that the tribunal had allowed retrospection in that case because the difference in liability amounted to 40% of the business profits. The tribunal had concluded…. "It was unreasonable for the Commissioners not to consider whether a very high proportion of "over-payment" might not be exceptional circumstances justifying an exercise of their discretion beyond the criteria they had laid down". She considered that as the difference in the VAT payments in the Appellant's business was less than 9% of his total turnover for the entire period there were no exceptional circumstances within terms of Alexander and Christine Wadlewski 13340. Further, the tribunals has consistently upheld the principle that, where a business operates a Retail Scheme according to the published rules (or an agreed version), the tax that is due under the scheme is the correct tax for the period. The fact that a different scheme produces a different or lower valuation is not itself an exceptional circumstance. An agreed witness statement by Yvonne Kilford was produced to the tribunal confirming the contents of her letter.

The Law

7. VATA 1994

S 26 B (1) The Commission 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 suppliers in any prescribed period shall be the appropriate percentage of his relevant turnover for that period

(2) (b) The "appropriate percentage" is the percentage so specified for the category of business carried on by the person in question

VAT Regulations 1995

By Reg 55K the appropriate percentage for the Appellant's relevant activities ( namely journalism) is set at 11%

part V11A regs 55A-55V set out the details of the scheme. Reg 55B

allows the Commissioners to authorise a taxable person to account for and pay VAT in respect of his relevant supplies with effect from the beginning of his next prescribed accounting period or "such earlier or later date as may be agreed between him and the Commissioners".

By Reg 55L a taxable person shall be eligible to participate in the scheme if he is unlikely to make taxable supplies in the year then beginning of greater than £150,000 and the total of his income in that year will not exceed £187,500

Public Notice 733 sets out further guidance on the scheme and includes at para 5.5

"when considering [a retrospective] start date we will consider all the facts including the timing of your application and your compliance record. We will not normally allow you to go back and use the scheme for periods for which you have already calculated your VAT liability"

HMRC internal guidance is set out in FRS3300 and FRS 3400.Such guidance provides:

The fact that a businesses will pay or would have paid less tax (under the scheme) is not sufficient reason to authorise retrospective use of the flat rate scheme

The policy is to refuse retrospection where the business has already calculated its VAT using a different method.

There must be exceptional circumstances where the policy previously described should be set aside.

VATA 1994 s 80(4) The Commissioners shall not be liable on a claim under this section-

(a) to credit amount under subsection (1) or (1A) above, or

(b) to repay an amount to a person under subsection (1B) above if the claim is made more than 3 years after the relevant date

Summing up

7. Mr Bird stated that the Appellant's grounds for appeal were as follows:

".. if the Tribunal allowed retrospection in [the] case of [Wadlewski] I do not see why that should not apply to me because my figures were less. I genuinely had no idea about the flat rate scheme until recently despite a VAT officer visiting. I maintain she should have pointed out I was paying too much VAT under the 17.5% rate…if I cannot be repaid [£20,348) I would have thought it reasonable to receive a "goodwill payment" because of the circumstances".

The Appellant contends not only that the decision not to grant retrospective entry to the scheme is wrong, but that he has in effect "overpaid" VAT in the sum of £20,348 which he reclaims.

An appeal lies to the tribunal with respect to decisions made by the Respondents refusing entry to the flat rate scheme. [VATA 1994 sect 83(fza)]. 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. In the present case the Respondents have followed the guidelines and reached a considered decision. Indeed on 2 April 2008 the Respondents invited the submission of further evidence to enable the investigation of "exceptional circumstances". The Appellant's figures, in that correspondence, show an over-payment of £20,348. His net profit figures for the whole period amount to £238,828 of which £20,348 represented 9% approximately.

8. In the Wadlewski case, Mr and Mrs Wadlewski were newsagents and they had calculated and declared their tax on the basis of retail scheme G to which they had been directed by the HMRC. It transpired that the scheme F was more appropriate. Under that scheme they would have paid £8000 per year less in VAT. Not only had the Waldewskies been encourage to use scheme G but they had been given the impression that a retrospective change in the scheme would be permitted. The tribunal allowed the appeal on the basis that the "over-payment" was an "exceptional circumstance".

In the present case, the Appellant had already calculated his VAT liability for each period up to 10.07 and continued to do so. The mere fact that previous liability had been calculated would not necessarily defeat a retrospective change, but would do so unless there were exceptional circumstances. The fact that the VAT due under the chosen scheme was greater than the VAT due under the Scheme in respect of which retrospective admission was sought was not of itself an exceptional circumstance.

9. The Appellant's lack of knowledge of the Scheme is not the fault of the Respondents .It is for the Appellant to keep himself appraised of the VAT developments and schemes notified to him from time to time by the Respondents. The over-payment was not sufficient to justify an exceptional circumstance. As a result, the decision taken by Yvonne Kilford was a proper exercise of the Respondents discretion and it is not up to the tribunal to substitute its own decision and the appeal must be dismissed.
10. If the tribunal were to allow the appeal then in any event the claim for payment of £20,348 would be subject to the 3 year cap (see VATA 1994 sect 80(4)).
11. The Appellant submitted that although he might have received the various notifications with regard to the Scheme he could not honestly remember if he had. He felt sure that if he had read and understood them, he would have asked to be put on the scheme earlier. He still felt that the officer who inspected his books in October 2004 should have told him about the Scheme.

The decision

12. We have considered all the facts and the law and have decided that the Yvonne Kilford acted unreasonably in not allowing the Appellant to be back dated to the Scheme retrospectively to a date 3 years from the period 10/07 the last period under which VAT had been paid using the normal system. We are grateful to Mr Bird, who referred us to the recent case of C J Anderson 20255,which has some useful observations with regard to the expectation of VAT officers, who visit businesses:

"16. The Respondents' VAT Guidance issued to its officers at paragraph 2 chapter 6 sets out the policy and background of the flat rate scheme:

The scheme is a simplification scheme under article 24 of the VAT sixth Directive. This means it has to be available only to "small undertakings" and be revenue neutral in its application across the board. Individual businesses may be winners or losers but the scheme remains valid because the flat rate percentages are set to provide tax neutrality across the eligible population. (paragraph2.2)

Yes the scheme should be encouraged (our italics). The scheme is an important part of the Department's response to the high level objectives of reducing compliance costs. You should take the opportunity to discuss this and other schemes whenever contact is made with an eligible business (paragraph 2.3)"

We have been told that a leaflet headed" Simplifying VAT for Small Businesses – Flat Rate Scheme" was enclosed with VAT returns between December 2003 and June 2004 so that the scheme was being heavily promoted 3 months before the officer's visit to the Appellant

Under paragraph 3.3 of chapter 6 specific advice is given for allowing a retrospective start date for the flat rate scheme:

" The regulations contain power to agree a start date earlier than the date of application so long as the business is not ineligible under the flat rate scheme rules at the time of the proposed start date This discretion should be exercised in the applicant's favour to encourage take up of the scheme. The start date can be any accounting period ending on or after 25 April 2002 for which a return has not been rendered."

Paragraph 5.5 Notice 733(March 2007 replacing February 2004) states at:

"3.11.2 Exceptional circumstances

The only examples of exceptional circumstances (amongst others) are:

……. Where the business has been misdirected by (omission or commission) by an officer of HMRC; or…….."

13. We accept that the Scheme is not designed to help those businesses, which complete their VAT returns on the usual basis and then discover, if they had asked for the Scheme to be applied, that they would obtain a substantial repayment. We accept that there must be exceptional circumstances and we were surprised when Mr Bird advised that as far as he was aware there had not been any exceptional circumstances applied by the Respondents in flat rate scheme cases.

We suspect that many businessmen do not read the various leaflets which are sent to them with their returns. We believe that the Appellant will have received the leaflets but he will not have read them. It is for that reason that we cannot agree that the Scheme should be back dated to the date of its introduction. We note, however, that when he eventually applied for the Scheme he was readily accepted and we are certain that if he had applied in October 2004 he would have similarly been accepted.

14. There is clear expectation from the VAT Guidance that the Scheme should be promoted. Paragraph 5.5 Notice 733 identifies as an exceptional circumstance where the business has been misdirected by (omission or commission) by an officer of HMRC. In our view this must include the failure by Ms Jones to alert the Appellant to the benefits of the Scheme. We have therefore decided that Yvonne Kilford acted unreasonably in not back dating the application to the period which is 3 years from the period 10/07.
15. Section 80 (4) of VATA 1994 applies and limits the retrospection to 3 years before 10 July 2008.
16. We leave it to the parties to calculate the amount of VAT which should be refunded to the Appellant. If agreement cannot be reached then the matter must be referred back the tribunal. We also award costs to the Appellant such costs to be agreed between the parties within six weeks of the release of this decision and in the event that they cannot be agreed to be referred to the tribunal for its decision.
David S Porter CHAIRMAN
Release date: 24 November 2008

MAN/08/0523