In Shields & Sons Partnership v HMRC [2017] C262-16 the European Court gave a preliminary ruling confirming that HMRC cannot withdraw a farmer from the VAT Flat rate scheme merely because they would be substantially better off than if they registered for VAT.
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Shields & Sons Partnership (SSP) were registered to use the Agricultural flat rate scheme (AFRS)
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This entitles SSP to charge a 4% supplement on sales to VAT registered customers as compensation for giving up the input VAT it could normally recover.
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The AFRS is different from the standard Flat rate scheme.
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SSP became more than £300k better off by using the AFRS than if they had registered for VAT in the normal way
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HMRC took the view that they were entitled to tell SSP to leave the AFRS as they were substantially better off under it, and this was as specified in their VAT Notice
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The First-Tier Tribunal (FTT) dismissed SSP’s appeal against that decision. The Upper Tribunal (UT) on appeal by SSP referred the case to the CJEU.
Following a review by the Advocate General earlier in the year, the CJEU followed his approach and found as follows:
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The flat rate is set by the Member State based on the guidelines provided by the CJEU
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Part of the guidelines is that the flat rate percentage should not be set to an amount which would result in farmers getting higher compensation than the input VAT they would recover if VAT registered.
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This is to be considered on a macroeconomic scale, i.e. it refers to all flat-rate farmers overall and not to each of them individually
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The scheme is designed to assist with administrative burden for farmers. Only categories of farmers which are not going to suffer administrative difficulties can be excluded.
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Farmers who would be substantially better off using the scheme than if they registered for VAT under normal circumstances is not a valid category which can be excluded.
This indicates that HMRC’s policy of rejecting applications where they expect farmers to be substantially better off using the AFRS, as well as the certificates that are withdrawn because the farmer is benefitting financially because of the scheme, are not in line with the EU VAT Directive.
On 21 December 2017, the UT applied the ECJ ruling, with the consequences:
- The appeal is allowed
- SSP's agricultural flat-rate certificate to be reinstated from the date it was withdrawn
- HMRC to pay costs
Links
Flat rate scheme: limited cost traders
Case:
ECJ: Shields & Sons Partnership v HMRC [2017] C262-16
UK Upper Tribunal: Shields & Sons Partnership v HMRC [2017] UKUT 0504
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