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HMRC internal manual

VAT Margin Schemes

HM Revenue & Customs
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Specific circumstances: Retrospection

Use of any of the margin schemes is optional, so requests for retrospection will be rare. In principle, retrospection may be allowed, subject to capping limits, if exceptional circumstances exist. There is no legal definition of exceptional circumstances. You should ask the trader to explain why he considers his case to be exceptional.

The majority of requests for retrospection come from businesses who either

  • did not know that margin schemes existed, or
  • did not realise that using a margin scheme would reduce their liability

when they originally accounted for VAT on their sales. Because the schemes are optional, the fact that a business would have paid less tax if it had used one is not sufficient reason to authorise retrospection.

Very occasionally, there may be exceptional circumstances where the policy described above 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, you should report the case to the Supply policy team.

Regardless of the circumstances behind the request for retrospection, if the goods were supplied to taxable persons on VAT invoices, you must consider the question of unjust enrichment before you make a decision about granting the request.

If you

  • believe the trader’s circumstances to be exceptional
  • have confirmed that he would not be unjustly enriched if you granted his request

your next step is to establish whether, for the past periods in question, the trader can meet the record-keeping requirements of the scheme he wants to use.

You may give the trader time to reconstruct his records to an acceptable standard but, if he can not meet the scheme’s record-keeping requirements, he can not use the scheme with retrospective effect.

If you have decided to refuse retrospection, then you should tell the business in writing. The letter should clearly state the main facts which you took into account and give your reasons for refusing retrospection.

Example of a successful request

The owner of a shop which sells second-hand office furniture is a sole proprietor. He has been using the Margin Scheme for some years without any problems and is a compliant trader.

In the course of conversation with him, you discover that one of his hobbies is restoring vintage china and selling it to private collectors.

He did not realise that this would be considered a business activity, so he has not accounted for VAT on any of the sales. He can produce clear evidence of his purchase and sales prices and can demonstrate that he has not sold any of the pieces to business customers.

In these circumstances, you should permit retrospection.

A Liable No Longer Liable business may complete its VAT return on a margin scheme basis if you are satisfied that it can meet the scheme’s record-keeping requirements. This is not considered to be retrospective use of the scheme because the business has not previously declared VAT on the full selling price of the goods.