Shields & Sons Partnership v The Commissioners for HM Revenue and Customs: [2016] UKUT 0142 (TCC) [2016] UKUT 0142 (TCC)

“54 Farmers etc. (1) The Commissioners may, in accordance with such provision as may be contained in regulations made by them, certify for the purposes of this section any person who satisfies them— (a) that he is carrying on a business involving one or more designated activities; (b) that he is of such a description and has complied with such requirements as may be prescribed; and … (3) The Commissioners may by regulations provide for an amount included in the consideration for any taxable supply which is made— (a) in the course or furtherance of the relevant part of his business by a person who is for the time being certified under this section; (b) at a time when that person is not a taxable person; and (c) to a taxable person, to be treated, for the purpose of determining the entitlement of the person supplied to credit under sections 25 and 26, as VAT on a supply to that person. 6 (4) The amount which, for the purposes of any provision made under subsection (3) above, may be included in the consideration for any supply shall be an amount equal to such percentage as the Treasury may by order specify of the sum which, with the addition of that amount, is equal to the consideration for the supply. (5) The Commissioners' power by regulations under section 39 to provide for the repayment to persons to whom that section applies of VAT which would be input tax of theirs if they were taxable persons in the United Kingdom includes power to provide for the payment to persons to whom that section applies of sums equal to the amounts which, if they were taxable persons in the United Kingdom, would be input tax of theirs by virtue of regulations under this section; and references in that section, or in any other enactment, to a repayment of VAT shall be construed accordingly. (6) Regulations under this section may provide— … (b) for the cases and manner in which the Commissioners may cancel a person's certification; … (8) In this section “designated activities” means such activities, being activities carried on by a person who, by virtue of carrying them on, falls to be treated as a farmer for the purposes of Article 25 of the directive of the Council of the European Communities dated 17th May 1977 No.77/388/EEC (common flat-rate scheme for farmers), as the Treasury may by order designate.”

“203 Flat-rate scheme (1) The Commissioners shall, if the conditions mentioned in regulation 204 are satisfied, certify that a person is a flat-rate farmer for the purposes of the flat-rate scheme (hereinafter in this Part referred to as “the scheme”). 204 Admission to the scheme The conditions mentioned in regulation 203 are that— (a) the person satisfies the Commissioners that he is carrying on a business involving one or more designated activities, (b) he has not in the 3 years preceding the date of his application for certification— 7 (i) been convicted of any offence in connection with VAT, (ii) made any payment to compound proceedings in respect of VAT under section 152 of the Customs and Excise Management Act 1979 as applied by section 72(12) of the Act, (iii) been assessed to a penalty under section 60 of the Act, (c) he makes an application for certification on the form specified in a notice published by the Commissioners, and (d) he satisfies the Commissioners that he is a person in respect of whom the total of the amounts as are mentioned in regulation 209 relating to supplies made in the year following the date of his certification will not exceed by £3,000 or more the amount of input tax to which he would otherwise be entitled to credit in that year. … 206 Cancellation of certificates (1) The Commissioners may cancel a person's certificate in any case where— (a) a statement false in a material particular was made by him or on his behalf in relation to his application for certification, (b) he has been convicted of an offence in connection with VAT or has made a payment to compound such proceedings under section 152 of the Customs and Excise Management Act 1979 as applied by section 72(12) of the Act, (c) he has been assessed to a penalty under section 60 of the Act, (d) he ceases to be involved in designated activities, (e) he dies, becomes bankrupt or incapacitated, (f) he is liable to be registered under Schedule 1, 1A or 3 to the Act, (g) he makes an application in writing for cancellation, (h) he makes an application in writing for registration under Schedule 1 or 3 to the Act, and such application shall be deemed to be an application for cancellation of his certificate, (i) they consider it is necessary to do so for the protection of the revenue, or (j) they are not satisfied that any of the grounds for cancellation of a certificate mentioned in sub-paragraphs (a) to (h) above do not apply. 8 (2) Where the Commissioners cancel a person's certificate in accordance with paragraph (1) above, the effective date of the cancellation shall be for each of the cases mentioned respectively in that paragraph as follows— (a) the date when the Commissioners discover that such a statement has been made, (b) the date of his conviction or the date on which a sum is paid to compound proceedings, (c) 30 days after the date when the assessment is notified, (d) the date of the cessation of designated activities, (e) the date on which he died, became bankrupt or incapacitated, (f) the effective date of registration, (g) not less than one year after the effective date of his certificate or such earlier date as the Commissioners may agree, (h) not less than one year after the effective date of his certificate or such earlier date as the Commissioners may agree, (i) the date on which the Commissioners consider a risk to the revenue arises, or (j) the date mentioned in sub-paragraphs (a) to (h) above as appropriate. … 209 Claims by taxable persons for amounts to be treated as credits for input tax (1) The amount referred to in section 54(4) of the Act and included in the consideration for any taxable supply which is made— (a) in the course or furtherance of the relevant part of his business by a person who is for the time being certified under this part, (b) at a time when that person is not a taxable person, and (c) to a taxable person, shall be treated, for the purpose of determining the entitlement of the person supplied to credit under sections 25 and 26 of the Act, as VAT on a supply to that person.”

“4.6 Can you refuse my application? We can refuse if…  your non-farming activities are over the VAT threshold, or  you would recover substantially more money through the flat rate scheme than the input tax you reclaim through VAT registration. This might happen because your input tax, when compared to your sales, is a much smaller percentage than the flat rate addition. But your application on these grounds will only be refused if the amount you stand to gain is more than £3,000 in the year following your application. This is calculated by comparing the flat rate addition that you 10 would be able to charge, with the input tax you would normally be able to reclaim.” (4) Paragraph 7.2 is as follows: “7.2 When must I leave the scheme? You must leave the scheme if you:  become liable to be registered for VAT as a result of your non-farming supplies going over the threshold  cease to produce agricultural goods qualifying for the flat rate scheme  cease to qualify as a flat rate farmer because you sell your business or ownership of the business changes from sole proprietor to limited company, in which case you can apply for a new certificate  become insolvent or otherwise incapacitated, or  are found to be recovering substantially more as a flat rate farmer than you would if you were registered for VAT in the normal way.” (5) Paragraph 7.3 is as follows: “7.3 When can Customs remove me compulsorily from the scheme? Some of the circumstances where we may cancel your certificate include where:  it is discovered that you made a false statement on your application  you have received a penalty for VAT evasion or been convicted of an offence in connection with VAT  you cease to be involved in designated activities  you die, or become bankrupt or incapacitated  you become liable to be registered under the VAT Act 1994, Schedules 1, 1A or 3  you make an application in writing for registration under Schedule 1, 1A or 3, which shall be seen as an application for cancellation of your certificate, or  they consider it is necessary to do so for the protection of the 11 revenue.”

“Paragraph 7.2 of the Notice [VAT Notice 700/46] covers circumstances when a business must leave the scheme and includes the situation where substantially more is being recovered under the AFRS than would be reclaimable from being VAT registered. Under paragraph 4.6 any benefit of more than £3,000 is seen as being significant and it would appear reasonable to apply the same value to define what is to be deemed as being “substantially more” when deciding if a business is required to leave the scheme under paragraph 7.2 of the Notice. Under this definition it is clear that the Partnership has obtained a substantial benefit from using the scheme, even if the losses incurred in 2007 and 2008 are taken into account. This benefit is likely to continue in the future and I therefore agree with Mrs Davidson’s decision to cancel the Partnership’s certificate to use the scheme from 15 October 2012.”

“68 In this appeal the Appellant seeks to rely on the direct effect of the Directive in resisting the Respondents withdrawal of its flat-rate certificate. 69 However there is no specifically precise provision of any of Articles 295 to 300 which deals with the question of the cancellation of such a certificate. In fact nothing is said in the Directive at all about the termination of consent by a member state for farmers to use the agricultural flat-rate scheme. This is a matter for national law to deal 14 with in the context of its development of a scheme which is compliant with and gives effect to the Directive. 70 What the Appellant contends is that Regulation 206(1)(i) , a provision of national law particularly having the object of ensuring compliance with Article 299 of the Treaty, is in some way incompatible with the Directive. … 73 The Directive does not devolve to the particulars of a scheme but allows member states to design their own schemes compliant with the objectives and purpose of the Directive. The purpose of the Scheme is the simplification of VAT for hard pressed farmers for whom the administration of the normal VAT regime creates difficulties. A further objective is the matching, so far as possible, of the flat-rate with the input tax otherwise payable by farmers in their various enterprises so as to achieve fiscal neutrality. 74 Article 299 requires that the flat-rate percentages may not have the effect of obtaining for flat-rate farmers refunds greater than the input tax charged. 75 That a member state should not be competent to include provisions designed to guard against abuse of the Scheme by reference to the possibility of over-recovery of flat-rate tax when compared to the input tax otherwise chargeable does seem to the tribunal to be an extraordinary proposition. 76 On behalf of the Respondents Mr Chapman contends that on a proper construction of Article 296(2) farmers for whom the flat-rate provides a benefit beyond the input tax chargeable represent a category of farmer to which regulation 206(1)(i) can properly be applied. The tribunal agrees. 77 Officer Davidson was asked whether HMRC had removed other farmers' certificates in similar situations. The tribunal was told that they had. In two other cases there had been an initial indication that the parties concerned would appeal but apparently they had not in fact persisted in this. HMRC is, we were told, looking more generally at those within the agricultural sector who may similarly be obtaining an advantage by operating under the scheme which was not intended by the directive. This tribunal sees no reason why it should not do this as this is entirely consistent with Article 299 of the Directive. 78 The conditions for applying for and admission to the flat-rate scheme include a requirement that the amount recovered under the scheme should not exceed by more than £3,000 the input tax which the applicant would otherwise be entitled to credit in the year following certification. Whilst this may not be expressed as a continuing condition it suggests that this does at least indicate the likely parameter of tolerance in respect of recovery of flat-rate tax which exceeds input tax otherwise 15 chargeable. 79 Following the exercise conducted by HMRC into the accounts of the Appellant it was found that for the three preceding years a substantial benefit had accrued to the partnership much in excess of the £3,000 referred to in the provisions of Regulation 204 which address admission to the Scheme. 80 It is perfectly true that this may have been the result of increased beef prices. It is also true that a lower rate of flat-rate tax would provide a reduced benefit but these are not considerations which the Respondent can entertain. To do so would be in conflict with the clear objectives and purpose of the Directive and in particular would put at risk the princip[le] of fiscal neutrality. 81 As indicated above the tribunal is not persuaded either that the Appellant is entitled to invoke the direct effect of the Directive. There is no clear and precise provision in the Directive to which it can point dealing with the matter of the circumstances in which participation in the scheme might be terminated. 82 It must have been within the contemplation of those considering the scheme at the European level that there might come a time when a member of the scheme at a national level was recovering more in flatrate tax than it would in respect of its input VAT. By wholly failing to address this issue other than in the broad terms of Article 299 the national legislatures were left to devise suitable rules which, so far as they were consistent with the Directive, would be expected to be upheld. 83 The arguments advanced by Mr Thomas on behalf of the Appellant are, in the view of the tribunal flawed for at least the reasons expressed above. 84 It was suggested by both parties that if the tribunal was to find against them, a course which was open to the tribunal would be to refer a question to the ECJ. That is not a course which this tribunal choses to follow. The question, if it was to be referred as suggested, would presumably be in the nature of an enquiry as to whether a member state was entitled to include legislative provisions entitling it to withdraw a farmer's certificate in circumstances in which it was recovering significantly greater flat-rate tax than the input VAT it would otherwise have incurred. Having regard to Article 299 and to a proper construction of Article 296(2) the answer is, it is suggested, obvious. The Appellant is within a category of farmers whose continued participation in the scheme is inappropriate by reason of its recovery of excess flat-rate tax in breach of the principle of fiscal neutrality.”

“should be regarded as exhaustive in relation to the conditions under which a member state which makes use of the option laid down in the first sentence of this paragraph may limit the application of the no-supply rule.”

“Flat-rate compensation does not achieve VAT neutrality on an individual 18 basis like the entitlement to deduct, but the basic idea of the scheme is to ensure neutrality of VAT for the group of flat-rate farmers as a whole, and to be as close to it as possible on an individual basis.”