Introduction

The case of March v. Revenue & Customs [2009] UKFTT 94 (TC) involves a dispute between Sally March, the proprietor of a riding school, and Her Majesty’s Revenue and Customs (HMRC). The core issues revolve around the application of the VAT Flat Rate Scheme, specifically concerning the denial of input tax claims related to construction costs for a new riding arena. The appellant contested HMRC's decision on three primary grounds: incorrect notification, classification of supplies as goods or services, and the refusal of retrospective withdrawal from the Flat Rate Scheme.

Summary of the Judgment

The First-tier Tribunal (Tax) adjudicated the appeal, addressing each of the appellant's disputes:

1. Incorrect Notification: The Tribunal found no merit in the appellant’s claim that HMRC’s notification was procedurally incorrect.
2. Goods vs. Services: The Tribunal upheld HMRC's classification of certain supplies as services, thereby denying the appellant the ability to recover VAT under the Flat Rate Scheme for those items.
3. Retrospective Withdrawal: The Tribunal deemed HMRC’s refusal to allow retrospective withdrawal from the Flat Rate Scheme unreasonable, effectively overturning this aspect of the initial decision.

Analysis

Precedents Cited

The judgment extensively references several key precedents which influenced the Tribunal's decision:

• Whitechapel Art Gallery ([2008] VAT & Duties): Addressed input tax recovery on refurbishment, emphasizing capital expenditure.
• Eventful Management Limited (VAT Decision Number 20300): Considered the classification of supplies under the Flat Rate Scheme.
• Anthony Jessop Price and Kay Price v HMRC ([2008] VAT & Tribunal): Involved VAT claims for haulage services under the Do it Yourself Builders Scheme.
• A and C Wadlewski VTD 13340: Established principles for exceptional circumstances in retrospective scheme changes.
• Customs and Excise Commissioners v John Dee Limited [1995] STC 941: Provided standards for assessing the reasonableness of HMRC’s decisions.

These cases collectively informed the Tribunal's understanding of how capital expenditures and scheme withdrawals should be treated under VAT regulations.

Legal Reasoning

The Tribunal meticulously dissected each dispute, applying relevant regulations and precedents:

• Dispute One: The incorrect notification was deemed a typographical error without substantive impact, aligning with regulatory provisions that do not mandate a specific notification format for adjustments not amounting to an assessment.
• Dispute Two: The classification of supplies was pivotal. Despite the appellant’s reliance on the Whitechapel decision, the Tribunal distinguished it from the present case, determining that the construction services did not qualify as capital expenditure goods under the Flat Rate Scheme.
• Dispute Three: The crux of the judgment lay here. HMRC’s policy for retrospective withdrawal was scrutinized for its rigidity and lack of consideration for individual hardship. The Tribunal found that the policy, which relied on an arbitrary 40% gross profit loss benchmark, failed to account for the appellant’s actual financial hardship, especially given the revelation of a net loss.

The legal reasoning underscored the necessity for HMRC to exercise discretion fairly, particularly when strict adherence to policy clauses results in undue hardship for taxpayers.

Impact

This judgment sets a significant precedent in the interpretation and application of the VAT Flat Rate Scheme, particularly regarding retrospective withdrawals. It emphasizes the need for HMRC to adopt a flexible and fair approach, especially in exceptional circumstances where rigid policies may lead to financial hardship for taxpayers. Future cases involving similar disputes may reference this judgment to argue for a more individualized assessment of scheme participation and withdrawal.

Complex Concepts Simplified

VAT Flat Rate Scheme

The VAT Flat Rate Scheme is a simplified VAT accounting method for small businesses, where VAT is calculated as a fixed percentage of turnover rather than on individual sales and purchases. This reduces the administrative burden but limits the ability to reclaim input VAT on most purchases.

Input Tax

Input tax refers to the VAT a business pays on its purchases and expenses. Under standard VAT accounting, businesses can reclaim this tax, but the Flat Rate Scheme restricts such recoveries unless specific criteria are met.

Capital Expenditure Goods

These are goods purchased by a business that are intended for long-term use, categorized as assets on the balance sheet. Under the Flat Rate Scheme, input VAT on capital expenditure goods exceeding £2,000 can sometimes be reclaimed.

Retrospective Withdrawal

This allows a taxpayer to exit the VAT Flat Rate Scheme for a prior period, enabling them to account for VAT under the standard method for that period. Such withdrawals are subject to HMRC’s discretion and assessed based on exceptional circumstances.

Conclusion

The March v. Revenue & Customs [2009] UKFTT 94 (TC) judgment highlights the delicate balance between regulatory compliance and fair administrative discretion. By allowing the appellant's appeal on the retrospective withdrawal issue, the Tribunal underscored the importance of considering individual hardships over rigid policy applications. This case serves as a critical reference point for both taxpayers and tax authorities, advocating for a more nuanced approach in the administration of VAT schemes to ensure fairness and prevent undue financial strain on businesses.