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Flat Rate Scheme - contradictory letters from HMRC

HMRC accepted an appeal against removal from the FRS, then issued Refusal to Use FRS notice?

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My client provides transport services, mainly to the local council for taking children to school. They have been using the VAT flat rate scheme. In February HMRC issued a 'Removal from the Flat Rate Scheme' notice as turnover had exceeded £230,000.

An appeal was made as the increased turnover was due to Covid restrictions - the children had to be transported separately especially if different schools were involved, so more journeys were required, and this was a temporary arrangement and turnover was expected to drop below £191,500 once Covid restrictions were lifted. A final VAT return was filed using the FRS (again showing them over the £230k threshold), then rather to my surprise HMRC wrote to me to say they could remain on the FRS scheme and 'we have re-instated you onto the scheme from 1 January 2021'. 

Unfortunately, 5 days later they issued a 'Refusal to use the Flat Rate Scheme' notice direct to my client. As the two letters appeared to contradict each other I phoned the VAT Helpline to try and clarify the situation.  The advisor did her best to be helpful but couldn't give me a definite answer and suggested I e-mail the Flat Rate Scheme department - which I did. The e-mail wasn't returned undelivered, but to date no reply has been received, and another VAT return needs to be filed by the end of next week.

So do I file the return using the flat rate scheme (which is advantageous) or not?

No recent applications to join the FRS have been made so the refusal must be related to the HMRC re-instatement, and could be based on an automated process that did not take account of the grounds for the appeal.

I have told my client that I think the most recent refusal letter will represent the HMRCs current position, and they should stop using the scheme, but I am thinking it might be better to file using the FRS and warn my client they may have to pay extra later, if that proves to be incorrect but I am unsure if that could risk penalties.

Has anyone any thoughts on this?

 

Replies (33)

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panda ketteringUK
By ketteringUK
29th Jul 2021 19:33

My initial thoughts are why these services are not 0% rated? Passenger transport???

If they're 0% then time to call in your PI provider as you might have provided your Client with very poor advice and shown a total lack of experience/professional curiosity.

My opinion is based on fairly limited information. Are these minibuses over 10 seats, small minibuses, coach?

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Replying to ketteringUK:
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By paulwakefield1
30th Jul 2021 09:12

Valid question but your middle paragraph is out of order.

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Jason Croke
By Jason Croke
29th Jul 2021 21:56

Well anything you do is going to be based on best judgement.

I doubt anyone can give you the correct answer because only HMRC can do that, if you take a view that the client is still on FRS (following your appeal to remain on it), then worse case is HMRC object once you file the next return and assess for the correct VAT due, doubt they'd issue a penalty if you have two contradictory letters from them.

You must still pursue HMRC to find out exactly what the situation is. The alternative is you accept client has left FRS and they cannot re-join for 12 months, so weigh up cost of leaving FRS against potentially erroneous VAT returns but with the confusion of HMRC's letters.

It seems odd for HMRC to accept your appeal and leave you on the scheme, only to then reject your appeal and take you off it, but HMRC are as organised as a bar brawl, so its anyone's guess.

Presumably the business is cars/taxis, rather than a mini bus, else, as the other poster has commented, FRS makes little sense.

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By fawltybasil2575
30th Jul 2021 01:08

@ Kernolive (OP).

I am a little surprised at the date of 1 January 2021, in the context of your question, being nearly 7 months ago.

When adding thereto the (apparently) conflicting interpretations by HMRC, I feel that the possibility of HMRC mis-application of FRS legislation (a relatively common occurrence) requires exploration. To that end therefore, may I ask:-

(i) Assuming that VAT Returns are submitted quarterly, the quarter-end at which the Turnover breached £230K for the first time,

(2) Which was the last VAT Return submitted (FRS, I understand, being applied).

(3) The “anniversary date”.

(4) In the light of the previous two responders’ comments, whether the Outputs (regardless of their having been treated as SR) should have been ZR.

(5) The date of the appeal against the initial removal from FRS; and the date from which HMRC INITIALLY stated FRS must not be applied.

Notwithstanding your responses to the above, and since you hold the very recent letter from HMRC (stating that FRS is reinstated with effect from 1 January 2021) then I would definitely recommend that the next VAT Return due be submitted under FRS.

Even disregarding your (sadly thus far unsuccessful) endeavours to obtain a sensible response from HMRC, your holding that recent letter should certainly ensure that no Penalties should be payable. IMHO the alternative of submitting a “non-FRS” VAT Return results in the much greater risk that HMRC will interpret such submission as your client’s admission that FRS was inapplicable.

Basil.

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Replying to fawltybasil2575:
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By rmillaree
30th Jul 2021 08:19

"I am a little surprised at the date of 1 January 2021, in the context of your question, being nearly 7 months ago."

Being frank the flat rate team are a disgrace to hmrc with regard to their "customer service" , i am not in the least bit surprised that the OP has possibly been waiting six months for a response then when one is received that is gibberish overall the team reponsible for their actions go awol. It's so far beyond unacceptable that there is no ability to speak to anyone at this team - even if it is to raise concerns about what this team is doing. Any organisation anywhere needs better management than this and i can only sympathise with the OP's plight here.

Practicably speaking all you can do is complain to as many sections of the vat office + agent mediators as you can , as you simply cannot rely on the faceless bods at flat rate section ever providing a reponse in a reasonable length of time.

All this department needs is one phoneline for agents and businesses to be able to call to raise any important issues so they can be satisfied that their query is being sorted.

Hopefully the email to the flat rate team will elict a reponse quicker than i fear may be the case.

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By Kernowlive
30th Jul 2021 10:19

Many thanks for the responses posted. To answer Fawltybasil's questions:-
1. the turnover first exceeded £230,000 in the Q/E 31/12/2020
2. HMRC removed my client from the FRS from the end of the current period, so the last return on the FRS was for the Q/E 31/03/2021.
3. the business joined the FRS when it commenced trading on 12/06/2017, so the aniversary date will be 11 June.
4. all vehicles used have less than 10 seats and do not qualify for zero rating.
5. the appeal was dated 24/02/2021, and HMRC said the FRS should not be used after 31/03/2021.
The letter from HMRC saying they could stay on the scheme was dated 25/06/2021, so four months after the date of the appeal.

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Replying to Kernowlive:
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By rmillaree
30th Jul 2021 10:40

Kernowlive
". the business joined the FRS when it commenced trading on 12/06/2017, so the aniversary date will be 11 June."
Do you know if the anniversary date is deffo the 11th of June? or could it perhaps be the 12th June? - i know is not particulrly relevant here but it may be highly relevant for some of my clients if its one day before the start date. If you have link to where the guidance comes from that confirms the calc that would be appreciated.

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Replying to rmillaree:
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By Kernowlive
30th Jul 2021 11:14

The HMRC letter accepting the appeal says "Your anniversary dates for the scheme still run from 12 June to the 11 June each year"

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Replying to Kernowlive:
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By rmillaree
30th Jul 2021 11:24

lol - only hmrc could ignore the dictionary definition of the word "anniversary" and bring a different date into the equation causing uncertainty. I wander if hmrc staff celebrate birthdays the day before they were born and celebrate their wedding anniversary a day earlier too! nothing in life is simple whne it comes to flat rate vat.

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Replying to rmillaree:
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By Hugo Fair
30th Jul 2021 11:40

I can find nothing on the internet to prove this, but ...
When I was a child (in the Middle East) I was told that crazy westerners celebrated, for instance, your 6th birthday on the day that you'd been alive for 6 years -
whereas any sane person would celebrate that same date as your 7th birthday (the first one having been on the day you were born)!

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Replying to Hugo Fair:
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By rmillaree
30th Jul 2021 12:06

I love this silly stuff - i still have a drunken argument with my mate down the pub once a year as to when the week starts - obviously i say the week starts on a monday - but some including my mate are convinced the weeks start on a sunday - google can't asnwer that one either unfotunately. and as to which day next monday is ...... - is it next monday or the monday after that - to me its next monday but some think otherwise.

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Replying to rmillaree:
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By Tax Dragon
02nd Aug 2021 06:55

Today is Monday 2nd. This Thursday is 5th. Next Thursday is 12th.

I was brought up believing weeks ended on the Sabbath - Saturday - and started on the Sunday. But see http://chartsbin.com/view/41671. No idea how reliable this is. But it shows a world divided on the matter. Blue starts on Sunday, yellow on Monday. Green has a start day of Saturday.

Much of Africa, it seems, either doesn't have a seven say week (and why should it?) or whoever drew up this map was unable to work out when such weeks started. Or the weeks start on other days and the - well, 'cartographer' sounds excessively generous, but hey, I'm feeling generous - didn't want to use more than four colours.

Oooh, that gives you something else to discuss next time you see your drinking partner - the four colour theorem. That's something you can google. You'll see it is now believed proved by computer, which spoils the fun a bit, but it ought to be provable more elegantly. Compare the proof of the five colour theorem.

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Replying to Tax Dragon:
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By Hugo Fair
02nd Aug 2021 11:58

"Today is Monday 2nd. This Thursday is 5th. Next Thursday is 12th."

A wonderful illustration of how English, a language full of subtle nuances in vocabulary and grammar, is denuded of accurate meaning when subjected to a colloquial shorthand.

"Next Thursday" actually means nothing when the phrase stands alone like that ... it needs to be followed by 'after' to qualify its relativity.
So ... 'Next Thursday after today' is the 5th (in your example); whereas 'Next Thursday after this week' (or 'Thursday next week') is the 12th.

The importance lies not in adherence to any particular rules of language but in achieving common comprehensibility (especially when suggesting a date to meet someone)!

Anyway I'm off to re-think my approach to the Four Colour theorem (it nearly put me off maths in the early '70s) ... secure that I have a safety net in the shape of Gödel's incompleteness theorem - which shows that mathematics contains true statements that cannot be proved.

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Replying to Hugo Fair:
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By Tax Dragon
02nd Aug 2021 13:02

We may have gone off topic. This https://www.irishtimes.com/news/science/goldbach-s-conjecture-if-it-s-un... is a piece of harmless fun.

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Replying to Tax Dragon:
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By ruth.julian
02nd Aug 2021 22:29

Sri Lanka, being Buddhist has an 8 day week based on the phases of the moon. This causes foreigners some confusion when they are in an hotel asking for a drink on a Poya ("sunday") day, or trying to do business in the week when it is a Poya day (especially for govt offices).

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Replying to ruth.julian:
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By Hugo Fair
02nd Aug 2021 23:10

25 public holidays p.a. ... do employees get additional days of paid holiday on top?

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Replying to ruth.julian:
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By Tax Dragon
03rd Aug 2021 07:01

Who knew that rmillaree's annual drunkenness would lead to topics of such interest? That's brilliant, thank you. (And I do hope some of all this makes its way into an upcoming anniversary drink... whether that's this anniversary or the next one.)

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Replying to Hugo Fair:
ALISK
By atleastisoundknowledgable...
30th Jul 2021 16:40

I was born in the Southern Hemisphere, time zones put my time of birth on 5th of the month local, 4th of the month in UK.
I celebrate my birthday as 5th, my brother keeps telling me it’s the 4th. But he can be a bit of a d1ck sometimes.

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Replying to atleastisoundknowledgable...:
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By Hugo Fair
30th Jul 2021 17:07

But which of you has realised that the disagreement is based on the longitudinal, not latitudinal, situation of your birthplace?

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Replying to Hugo Fair:
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By Rgab1947
02nd Aug 2021 10:33

Yeah, lived in Far East and same view. I prefer the Western approach. makes me a year younger and I don't have to think 9 months and 12 months' years.

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Jason Croke
By Jason Croke
30th Jul 2021 14:31

https://www.gov.uk/hmrc-internal-manuals/vat-flat-rate-scheme/frs4200

Where a business using FRS and annual accounting becomes ineligible for FRS on the basis of the first turnover test, it must cease to use the FRS at the earlier of either:

the end of the period in which the anniversary of joining the FRS falls, or
the end of the month following the month in which the anniversary falls.
Example:

A business starts to use annual accounting and FRS on 1 May 2006.

Its annual accounting year runs from 1 May to 30 April.

On performing the turnover test on 1 May 2007, it exceeds the limit for FRS. Its prescribed accounting period ends on 30 April 2008. It must stop accounting for VAT using the FRS on 30 June 2007.

The business may leave the FRS but if it remains eligible for annual accounting, it may stay in that scheme. Remember, that a business may leave the FRS in the middle of an annual accounting period. In such cases, the annual return will be calculated using the FRS until the date it leaves the scheme, and using normal accounting for the rest of the period.

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Replying to Jason Croke:
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By Kernowlive
30th Jul 2021 15:23

Thank you Jason,
I had seen that, and it will apply here. However, there will still be a benefit of over £3k from staying in the FRS for even just the Q/E 30/06/2021.
As there appears to be no clear answer here, and failing any last minute response from HMRC, I think I will go for the safest option and leave it to my clients to decide! Given the potential saving involved they may well think it worth risking some inconvenience.

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Replying to Kernowlive:
Jason Croke
By Jason Croke
30th Jul 2021 15:45

Nice "pass back" to the client, but the right thing, give them the options then they can make an informed decision.

As I posted earlier, if you accept coming off the scheme then that decision is final for at least 12 months, whereas if you take the risk of disregarding the last HMRC letter, worse case is HMRC insist their last letter was actually valid and you did have to leave the scheme, okay, so what? Then client ends up paying over the extra VAT (the difference between their flat rate and the full VAT rate), client has already charged the customer full VAT (20%) anyway and so is not out of pocket if they have to pay that extra bit over to HMRC, client just loses the £3k "benefit" they got from the FRS and any penalties likely to be mitigated due to the confusion/contradiction and delays.

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By fawltybasil2575
30th Jul 2021 15:51

@ Kernolive (OP).

With respect to Jason, his last post has caused you unnecessary confusion, since it is based on the false premise that your client is operating annual accounting (your earlier post confirmed that you were NOT operating annual accounting as you referred to quarterly VAT Returns).

The next anniversary date is 12 June 2021, and hence HMRC were out of order in seeking to terminate FRS from 1 April 2021.

The HMRC letter of 25 June 2021 is fine.

HMRC would only be able to terminate the FRS earlier than normal if they had notified your client that operating FRS was an abuse of process and/or if they had contended that the client had operated FRS invalidly (there is nothing in any of your posts to indicate that either of those factors applies in this case).

Please do NOT proceed on the basis of your last post, but in accordance with my first post.

Basil.

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Replying to fawltybasil2575:
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By fawltybasil2575
30th Jul 2021 15:58

For the avoidance of doubt, my last post was in response to Jason’s 14.31 post.

Basil.

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Replying to fawltybasil2575:
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By Kernowlive
30th Jul 2021 16:34

Hello Basil,

Thank you for that, but VAT Notice 733 says at 12.2 (a) that the use of the FRS must cease at the end of the month/quarter in which the turnover in the 12 months to the anniversary date exceeded £230,000. Which isn't limited to annual accounting.

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By fawltybasil2575
30th Jul 2021 17:13

@ Kernowlive.

I fully understand your point. However, the crucial point is that HMRC have “jumped the gun” in seeking (in one their two conflicting stances) to terminate the FRS. All that happened earlier this year is thus effectively a nullity.

The anniversary date was 12 June 2021, and hence your client should notify HMRC that (if that assumption is correct, which appears almost certain) the turnover for the 12 months to that date was over £230K, but that it will be below £191,500 pa from that date (effectively going over the same ground as before, of course).

Forgive me, but this is a matter of which I have extensive experience. You should hold your ground (ie the client’s ground) and your nerve.

Basil.

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Replying to fawltybasil2575:
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By Kernowlive
01st Aug 2021 16:56

Hello Basil,

Thank you for the clarification and your assistance is much appreciated.

One thing that concerns me is that VAT Notice 733 says at 12.5

HMRC may withdraw the scheme at any time for the protection of the revenue. They will specify the date of withdrawal in a notice of withdrawal.

No definition of ‘protection of the revenue’ is provided, and the only definition I can find relates to VAT groups which hardly seems relevant. VAT Notice 733 doesn’t say that 12.5 is restricted to VAT groups.

If HMRC try to use 12.5 to justify the original removal are there any grounds for contesting that?

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Replying to Kernowlive:
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By rmillaree
02nd Aug 2021 09:12

Kernowlive

Presuming its clear from the letter that the reason for removal was turnover related and its clear that they have performed this test at the wrong Date - then its reasonably IMHO clear that they have not removed your client for revenue protection purposes and therefore the letter has been comiled in error.

It is the case that the flat rate team are sending quite a few of these erroneous notices that simply need "cancelling".

The vat office could in theory try it on ref anything they wanted to but if there is nil indication they have gone down that route in the first place i can't for a second believe they would try and argue that now and try and rewrite history when they have confirmed teh reason is something else - even if they did hopefully they would be given short shrift when its pointed out that wasn't even mentioned in their orriginal reason for removal.

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Replying to rmillaree:
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By doubletrouble
02nd Aug 2021 09:21

One of my clients had a similar problem, they received a letter from the FRS team to say they had been accepted for the scheme then 4 days later they received another letter to say they must stop using it due to high turnover, they were nowhere near the threshold so I phoned the VAT registration team who said they only had records of the acceptance letter but not the later one, they said it must have been sent in error, they told me to email the FRS team explaining this which I did but have received no reply.
My client is continuing to submit returns using the FRS

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By fawltybasil2575
02nd Aug 2021 10:26

@ Kernowlive .

In answer to your post at 16.56 yesterday, such decisions are indeed appealable [under S.83 (fza) VAT Act 1994]. That said, there appears to be no indication that HMRC would:

“try to use 12.5 to justify the original removal”,

nor IMHO would HMRC be entitled to do so. Notices issued by HMRC must show the grounds for issue (removal under the “protection of the revenue” banner is appropriate only in exceptional circumstances, and I see no “exceptional” element in your client’s case anyway).

From reviewing the “timeline”, from you initial question and later post, the first notice was issued, albeit incorrectly, as I have mentioned previously (due to HMRC’s misinterpreting the legislation) as a result of the turnover’s having the £230K limit for the 12 months to 31 December 2020: that notice stated that the FRS would end on 31 March 2021 (that “3 months extra” factor is standard, for a quarterly Return person, and rightly so given that the person would need reasonable notice of removal).

I assume therefore that the second notice will have been issued (albeit again erroneously, for the same reason as for the first notice) ROUTINELY, as a result of the turnover’s having exceeded the £230K limit in the 12 months to 31 March 2021: if such assumption is therefore correct, it will presumably state that the FRS must end on 30 June 2021: if so, of course, the Return for the quarter 30 June 2021 can be submitted under FRS without any question of challenge by HMRC.

Re the second notice, I am unsure whether an appeal has already been submitted: if not, then it is important to submit an appeal. The strict grounds for such appeal should be that the notice has been issued prematurely, for the reasons which I have given previously, but it is entirely OK to add that the future turnover will be below £191,500 also.

Basil.

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Replying to fawltybasil2575:
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By Kernowlive
02nd Aug 2021 11:40

Thank you to all who responded, Basil in particular. Sometimes the AW forums work brilliantly well, especially given the disparity of recources with HMRC

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By cfield
02nd Aug 2021 10:40

It's one of those "cover your back" jobs. Send a letter by registered post to HMRC FRS with copies of their 2 letters and inform them that you are relying on the one accepting your appeal on the grounds a human being took the trouble to write it, and no letter was received specifically revoking it, whereas the one telling you to exit the FRS appears to be computer-generated and could easily have been triggered by failure to update their systems (or program them properly in the first place). Carry on using the FRS until it seems likely the client will exceed the £230k per annum permanently and then exit from the appropriate date. Calculate the potential shortfall in the Box 5 figure each quarter and warn the client to set aside sufficient funds to cover it should HMRC insist that their exit letter was right and an appeal is either not possible or not upheld. Save copies of the emails to HMRC so you have proof that the contradictory letters were queried at the time. That should be enough to get any penalties overturned, so worst case scenario is the loss of the gain under the FRS.

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