Confusion over withdrawal of cash basis

The taxpayer had an interest in three companies. Two were building companies and could not use the cash accounting scheme because their annual taxable sales exceeded the joining threshold of £1.35m. The other PMR Ltd supplied project management services to the building companies and was eligible to use the scheme.

In 2014 HMRC carried out a compliance visit and identified that PMR invoiced the other two companies but did not account for output tax because they could not afford to pay their bills. But the other two companies still claimed input tax on an accruals basis leaving HMRC out of pocket. The officer therefore told PMR to leave the cash accounting scheme. 

Lengthy correspondence followed between the taxpayer and HMRC about the exit date from the scheme and the department acknowledged it should not have told the company to leave the scheme retrospectively. A...