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HMRC internal manual

VAT Flat Rate Scheme

Treatment of Applications: Considering requests for retrospective use of the FRS

When considering a request for retrospection, you should first ensure that the business met the eligibility conditions in force at its requested start date and period of intended use.

For example:

  • As the scheme did not come into effect until 25 April 2002, you cannot allow an earlier start date to this.
  • If the business’s turnover was above a previous entry threshold, or exit threshold, for joining/leaving the scheme in force during the retrospective period, then the business would be ineligible for the FRS.

Once the business’s basic eligibility for the FRS has been established, you should then take into account the following:

  • Each case should be considered on its own merits. Consider all relevant facts relating to the request, including the business’s overall compliance record. In line with the rationale of the scheme, (see next but one bullet) the fact that a business will pay, or would have paid, less tax, is not sufficient reason to authorise retrospective use of the FRS.
  • Belated notification of a liability to register for VAT - including ‘trader liable no longer liable’ cases - is not a reason to disallow retrospection automatically. This is because use of the scheme may help both the business and HMRC to calculate the arrears more quickly and easily. However, if you have further reason to doubt the business’s compliance (for example, there is other evidence that allowing the scheme would present a revenue risk) then retrospection should be disallowed.
  • The policy is to refuse retrospection where the business has already calculated its VAT liability for the period(s) using a different accounting method (but see next bullet, below). The reason for this is that the FRS exists to simplify VAT accounting and record keeping for small businesses, so that they are able to spend less time on VAT. If allowing retrospection will enable the business to benefit in this way, then you should consider granting the request. This policy has been well supported in a number of cases, most notably in the High Court case of David Eric Burke ([2009] EWHC 2587).
  • The proper exercise of the power to allow retrospection means that we should be prepared to recognise there may be exceptional circumstances where the policy described in the previous bullet should be set aside. 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. If you think that there are such circumstances, the case should be reported to Subject Matter Experts (SME), VPOT, 1st Floor Regian House, Liverpool, L75 1AD with a recommendation.

FRS3400 provides further guidance if you decide to allow retrospection. FRS3500 provides further guidance if retrospection is to be disallowed.