VAT CASES - 03.02.2020

HMRC correct to block retrospective flat rate scheme registration

The case. Holy Cow! Ice Cream Co Ltd (HC) applied to join the flat rate scheme (FRS) in August 2017, asking for the application date to be backdated to the VAT period starting 1 January 2017. HMRC refused because the March and June 2017 returns had already been submitted, so it was not possible for the time-saving benefits of the scheme to be enjoyed for these periods. HMRC allowed a start date of 1 July 2017.

The company was unprofitable, and the scheme backdating by six months would have saved VAT of £2,023, which the taxpayer claimed was money crucial to its business and an “exceptional circumstance” to justify backdating.

The law. A strict application of the law means that a business can join the FRS for the beginning of the VAT period that begins after its application date. However, HMRC has the power to allow a business to backdate its application, and will generally allow this if a return is still outstanding for the period(s) in question. A business can join the scheme if it expects its taxable sales in the next twelve months to be less than £150,000 excluding VAT. This includes zero-rated sales, but not any income related to exempt supplies, or those outside the scope of VAT.

The decision. The court supported HMRC’s view that a lower tax bill was not an exceptional reason for backdating an application to join the scheme. The FRS manual notes that “exceptional circumstances” in this regard would likely involve compassionate circumstances, or a scenario where the decision might be paramount to the survival of the business. This clearly didn’t apply to HC and the appeal was dismissed.

Key points.HMRC’s manual FRS3300 states that a business might be able to backdate its application if there are exceptional circumstances. But the manual then adds that HMRC has never identified such a case since the scheme was introduced in 2003. It is therefore wise to not seek to retrospectively join the scheme unless returns are outstanding for the periods in question.