An engineering business has won an appeal against HMRC after it disputed the legality of official guidance on the VAT flat-rate scheme (FRS) for small businesses.
When mechanical engineer Neil Harris registered his Cumbrian-based company for the FRS in 2009 none of the categories on the list supplied by HMRC appeared relevant to his business. After advice from his accountant he registered under "Any other activity not listed elsewhere", with a flat rate of 12%.
Following a VAT inspection three years later, HMRC ordered that Harris should have registered in the category ‘Architect, civil and structural engineer or surveyor’. HMRC’s cited its own flat-rate scheme guidance leaflet, which placed "engineering consultants and designers" in the 14.5% VAT category.
It demanded arrears of £8,891 plus a 35% penalty, later reduced to 15% after a review.
Harris and his accountant, Trevor Morris of TaxAssist Whitehaven, challenged the decision on the grounds that a mechanical engineer is not a civil or structural engineer.
To support their case against HMRC they got advice from Glyn Edwards, a VAT consultant at Wolters Kluwer CCH, which provides information and services to accountants.
The first-tier tribunal ruled in Harris’s favour. He walked away with nothing to pay and, as he had fee protection insurance with CCH, his accountant’s fees and the cost of Glyn Edwards’ time were also covered, CCH said.
“The key to the whole issue was that the guidance notes had no backing in law,” Harris said. “I wouldn’t have known that, but Glyn did. I would have lost the case on my own.”
Glyn Edwards commented: “Although there was a relatively small amount of tax at stake, this could have caused the collapse of Mr Harris’s business. This has been a successful outcome and establishes an important principle. But I do wonder how many other engineers have been misled by the VAT guidance notes from HMRC into using a category that is only intended for structural and civil engineers.”
The tribunal's decision (TC/2013/03647) hasn't been published yet, although AccountingWEB has seen a copy.