Hope melts away for ice cream maker
Neil Warren considers a case where HMRC’s VAT manual gave an ice cream business hope that it could retrospectively join the flat rate scheme.
I am a big fan of HMRC’s VAT manuals and always encourage advisers to use them. Those manuals are the key reference point for HMRC’s compliance officers when dealing with the tricky aspects of tax.
However, the HMRC manuals need to be used with care, and can sometimes give false hope. An example relates to paragraph FRS3300, the policy note on when HMRC might allow a business to retrospectively join the flat rate scheme (FRS).
Backdate the joining date
Strict application of the law dictates that the FRS joining date for a business will be the beginning of the VAT period after the application has been received, or an earlier or later date if agreed by HMRC (1995 VAT Regulations, SI 1995/2518, Reg 55B).
If your business reports VAT on calendar quarter returns, and you apply to join the FRS on 13 November 2019, your joining date will be 1 January 2020. However, HMRC accepts a backdating as long as no VAT return has been received for the period(s) in question, ie there would be no problem joining from 1 October 2019, in this instance.
The HMRC logic is simple: the purpose of the FRS is to save time and administration costs for a small business (and not save tax), and this potential saving has been permanently lost if a return has already been submitted based on normal VAT accounting.
Holy Cow! Ice Cream Co Ltd (TC7400) applied to join the FRS in August 2017, asking for the application date to be backdated to the period starting 1 January 2017. HMRC refused because the March and June 2017 VAT returns had already been submitted, so it was not possible for the time saving benefits of the FRS to be enjoyed for these periods. HMRC allowed a starting date of 1 July 2017.
The company was unprofitable, and the scheme backdating would have saved VAT of £2,023, which the taxpayer claimed was crucial to the survival of the business and therefore an exceptional circumstance to justify backdating. The tribunal saw no reason why the backdating should be allowed and dismissed the appeal – the £2,023 windfall was not a make or break receipt.
VAT manual problem
The problem is that the FRS manual FRS3300 gives taxpayers a glimmer of hope that they might be able to backdate their FRS application, where a return has already been submitted for a period, if there are “exceptional circumstances.”
The FRS manual says: “In principle, such cases are likely to involve compassionate circumstances, or the survival of the business, but we have not identified to date any case
where such circumstances justify a departure from the normal policy.”
The FRS is now in its 17th year so if no “exceptional circumstances” have yet been identified by HMRC, then it must surely be time for the manual to be updated to close the door once and for all on this issue.
Previous case law
In reality, any small hope of success on this issue was ended ten years ago in the High Court case of HMRC v Burke Ch D  EWHC 2587. The judge supported HMRC’s refusal to backdate the joining date for a freelance journalist: “if a taxpayer has already accounted for VAT in the past on the normal basis, and in accordance with the general law then in force, there is no way in which retrospective admission to the scheme can simplify the accounting exercise that he has already carried out.”
The Holy Cow case wasted a lot of people’s time, which is not good news for anyone. It is time to update the FRS manual!