The VAT Flat-Rate Scheme (VAT FRS) is available to small businesses or sole traders and is designed to simplify VAT accounting, not to reduce VAT bills. An in-hindsight VAT FRS request in the business world has become a VAT-saving technique for many small business and freelancers, which is why it is crucial to get the VAT flat rate right, and claim the maximum benefit making a decision beforehand, which will also mean you avoid the disappointment of loosing the very few benefits that HMRC allows. So make sure that you:
1) Identify the correct VAT scheme, whether standard or the FRS;
2) Ensure that you are in the correct category under the FRS.
Retrospective entry to the VAT FRS is consistently being refused by HMRC, and recent cases highlight the potential of huge retrospective bills and fines for failure to register for FRS under the right category. Find out more about VAT and the FRS.
Retrospective entry to the VAT FRS, the Case of Mr. J. A. Goodman
In a recent case heard at the first-tier Tribunal, a Mr. Goodman appealed HMRC’s decision to refuse retrospective entry to the VAT FRS. Mr G. had provided a consultancy service between 1 July 2012 and 28 February 2014; however, while Mr. G. had registered for VAT at the same time as starting his consultancy business, he did not apply to join the VAT FRS. He only applied for FRS when he became aware of it in May 2014, at which date he had already ceased trading.
- HMRC refused Mr. G.’s request for retrospective admission from the date on which he began trading, and instead backdated admission to the date of Mr. G.’s entrance to the scheme on 1 March 2014.
- The Tribunal agreed that Mr. G. satisfied the necessary criteria for admission to the VAT FRS from 1 July 2012, but rejected Mr. G.’s argument that he had overpaid VAT (stating that the correct amount under the standard VAT rules was paid).
- The Tribunal ruled that HMRC had no duty to permit retrospective admission, particularly as there were no exceptional circumstances, and dismissed Mr. G.’s Appeal as well as rejecting his request to retrospective entry to the VAT FRS.
Retrospective entry when the business is no longer trading
It probably did not help Mr. G.’s case that he had already closed down the business. Another case (G. Seelf, TPL Associates) makes this clear: “In order for retrospective entry due to exceptional circumstances to apply there would need to be firm evidence that a trader would be put out of business as a direct result of a decision to refuse retrospection. In your case [G. Seelf], it appears the business has already ceased to trade and retrospection cannot be allowed simply to reduce any outstanding tax due.”
Retrospective entry to the right category under VAT FRS
Another case heard in 2014 concerned a mechanical engineer, Neil Harris, who had registered for VAT under “Any other activity not listed elsewhere” (at flat rate of 12%). HMRC argued that Mr. H. should have registered under the category “Architect, civil and structural engineer, or surveyor” (at flat rate of 14.5%). Note that HMRC demanded arrears of £8,891, plus a 35% penalty, reduced to 15% under review. Harris happened to have a good brief on his side and won his case on a technicality to do with HMRC’s guidance on categories, where “the key to the whole issue was that the guidance notes had no backing in law.”
Is HMRC ever sympathetic to retrospective change for VAT FRS?
Seldom is HMRC sympathetic to retrospective claims and the outcome is dependent on the reason for requesting, but with all these matters discussed, clearly, being on the right scheme in the right FRS category is essential. Remember, the scheme is designed to simplify VAT accounting and not to reduce VAT bills. If a business has already submitted VAT Returns on the normal basis, a retrospective application to join the FRS would not meet the aim of the scheme.
It is essential to identify the correct VAT scheme, whether standard or flat rate, and to ensure that, when registering, the right category within the VAT FRS is selected. As VAT retrospective changes are more often refused than allowed, with the fines and penalties associated with errors, be warned!
VAT is complicated, and needs careful administration. Few other Chartered Accountants offer the level of service DNS provides its clients. DNS puts everyone at an advantage regards VAT and all other compliance issues, not least because our online bookkeeping and accounting system has a unique VAT scheme calculator that alerts both clients and account managers to the correct scheme.
Please discuss any VAT matter or anything else of relevance with DNS; should you wish to apply for the FRS available to VAT-registered small businesses, make sure you make the decision, apply under the correct category, register, and then claim, in that order.