Was HMRC correct to withdraw retailer from flat rate scheme?
The case. Pierre Divisia (PD) was an Amazon seller based in France. As some stock was stored in a UK warehouse and sold from there, the business registered for UK VAT in February 2018. PD also applied to join the flat rate scheme (FRS), and the request was accepted by HMRC. However, HMRC retrospectively cancelled PD’s use of the FRS in September 2020 and issued an output tax assessment for £7,612, covering April 2018 to April 2020.
The law. The FRS means that a business calculates how much VAT is payable on their return according to a fixed percentage of total sales made in a period; the relevant percentage depends on the trade category to which the business belongs. Scheme users cannot claim input tax unless it relates to capital goods costing at least £2,000 including VAT. HMRC has the power to protect the revenue by cancelling use of the scheme from a current or historic date.
The decision. The judge decided that HMRC was wrong to withdraw PD from the FRS. There had been nothing underhand going on that justified the officer’s decision. PD had made a series of errors, mainly caused by the complexities of goods being moved around Amazon warehouses in different EU countries. The judge instructed HMRC and PD to recalculate the assessment by applying the FRS to all relevant periods.
Key issues.HMRC’s reason for withdrawing PD from the FRS was because: “Our compliance check has identified errors that you have made on your VAT returns”. As the judge noted, making errors is not sufficient to deny the use of the scheme. Challenge HMRC if it makes a similar decision for your business.
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