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HMRC internal manual

VAT Retail schemes guidance

Eligibility and refusal to allow use of a retail scheme: The power to refuse use of a retail scheme: Fair and reasonable

Refusal of use under Regulation 68(a) should be considered where a particular scheme gives a result that is not fair and reasonable in the context of an individual retailer.

In considering what is fair and reasonable, there have been some helpful comments in tribunal cases concerning partial exemption methods. For example, in the case of the Merchant Navy Officers Pension Fund Trustees Ltd [LON/95/2944] (decision released 1 July 1996), the tribunal Chairman commented (at page 7 of the decision, line 23):

‘What is fair and reasonable is not an absolute concept and will frequently depend on the alternatives.’

He considered that the phrase applies not only to the result produced by the method but the method itself (also at page 7, line 12).

‘The method must be reasonable for the trader to operate, in that it does not involve disproportionate or unreasonable resources, and it should be capable of being checked by the Commissioners again without unreasonable effort.’

He also went on to say that the Commissioners must consider what alternatives are available when exercising their discretion (in that case under the partial exemption regulations).

‘If those alternatives resulted in the use of a method, which is less fair and reasonable, then clearly the Commissioners would not be using their powers to secure a fair and reasonable result.’

Similar comments on the fact that there can be a number of methods, each of which could be fair and reasonable, and the need for methods to be verified by us without unreasonable effort were made by the tribunal Chairman in the case of BMW (GB) Ltd [LON/96/733] (decision released 2 April 1997).

There have been two cases on refusal of use of retail scheme B -

  • United Norwest Foodmarkets Ltd [MAN/96/422] (decision released 23 May 1997) and
  • Jubilee Fashions Ltd [LON/96/1116] (decision released 18 July 1997).

In the Foodmarkets case, the appeal was successful because the tribunal found that the Commissioners placed too much weight on a tax avoidance aspect (which could not be evidenced) in making their decision. In the Jubilee case, the tribunal found that the Commissioners had given implicit authorisation to the use of the scheme by their actions, not just in processing the first return under the scheme but checking it, making the refund, and advising the trader verbally that there were no problems with it.

As an outcome of these decisions and discussions with Counsel, the following points should be borne in mind in future when considering exercising the discretion to refuse use of a scheme on the grounds that it does not produce a fair and reasonable valuation of tax due:

  • weigh up all the facts: do not refuse use only because you suspect tax avoidance;
  • consider using the either/or option - fair and reasonable and/or protection of the revenue; and

Consider using protection of the revenue if you can show that there was significant distortion in a particular tax period: see VRS2365