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VAT & FRS - Good plan, or naughty?

New client, c. £52k turnover would fall within 12% FRS Rate - the benefit of being the FRS would be a further £2.5k in his pocket courtesy of her maj. However, he is in a trade where a reasonable outlay on tools has been incurred over the preceeding 4 yr.

If I register him for VAT, calculate the first return on an invoice accounting basis and claim vat on all tools up to press and subsequently from quarter 2 apply for FRS registration to take advantage of the lower rate, am I having my cake and eating it?

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I think...

... you can put him on FRS immediately and claim VAT on pre-registraion expenditure without regard to the £2,000 capital limit.

I may be wrong, but I'm sure that's what the relevant VAT Notice said, when I considered a not dissimilar situation before.

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01st Jun 2012 11:21

Good shout

Notice 733

7.6 Can I recover VAT on stock and assets I have on hand at registration?

Yes. Record the claim for eligible VAT in your VAT account for your first VAT return.

For details of the rules for claims, see Notice 700/1 “Should I be registered for VAT?” (Part V8)

If you do claim VAT on capital assets on hand at registration and dispose of them later, you must account for VAT at the standard rate of VAT under the normal VAT rules.

 

 

 

 

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01st Jun 2012 11:23

Don't know about the notice but the law says it

As Steve has mentioned you are entitled to recover pre-reg expenses in full (subject to normal rules e.g. no business entertainment, cars etc.), even where FRS begins from the effective date of registration.

Regulation 55F (of VAT Regs 1995) says that where a claim is made under Reg 111 (exceptional claims i.e. pre-reg expenses) then the flat rate rules shall not apply to prevent that recovery.

So not only can you have your cake and eat it, but it'll have those little silver balls on top as well.

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01st Jun 2012 12:01

.

spidersong wrote:

As Steve has mentioned you are entitled to recover pre-reg expenses in full (subject to normal rules e.g. no business entertainment, cars etc.), even where FRS begins from the effective date of registration.

Regulation 55F (of VAT Regs 1995) says that where a claim is made under Reg 111 (exceptional claims i.e. pre-reg expenses) then the flat rate rules shall not apply to prevent that recovery.

So not only can you have your cake and eat it, but it'll have those little silver balls on top as well.

 

It tastes good.

 

Thanks all!

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01st Jun 2012 11:34

£2.5k P A

Purely for your own amusement, try to work out how much extra your client would have to work to net an extra £2.5 per annum.

In your case it looks like more than two weeks. Why HMRC feels the need to fund this escapes me.  

Of course, I am not advising not to do it. It's just it seems a particularly generous scheme that is at odds with taxation in general in the UK and HMRC's general view in particular.

  

 

 

 

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By DMGbus
01st Jun 2012 13:53

Benefits of scheme / revenue neutral
£2.5k P A Roland195 PM | Fri, 01/06/2012 - 11:34 | Permalink

Purely for your own amusement, try to work out how much extra your client would have to work to net an extra £2.5 per annum.

In your case it looks like more than two weeks. Why HMRC feels the need to fund this escapes me.  

Of course, I am not advising not to do it. It's just it seems a particularly generous scheme that is at odds with taxation in general in the UK and HMRC's general view in particular. 

=======================

=====REGARDING ABOVE COMMENT======

I specifically remember that when the scheme was introduced:

1. The scheme was intended to be revenue neutral - in effect for every winner there would be a loser

2. HMRC had the power to eject a business from the scheme "for the protection of the revenue" - ie. if good for client then client can't continue to use it if at HMRC's whim they (HMRC) so decide

3. Scheme was nothing to do with reducing liability but intended solely to ease VAT record keeping (undermined by some fine detail rules, as it happens)

NOW, I've never seen any reports of anyone being ejected from the scheme.

One thing that intrigues me is that I sometimes see comments that the FRS is "definitely better" for most or all businesses.  I usually find it works the other way, an example I looked at this morning would have had an annual VAT liability of £3,278 under FRS as opposed to £1,474 under conventional VAT accounting.  

 

 

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01st Jun 2012 15:35

Revenue Neutral?

DMGbus wrote:
I specifically remember that when the scheme was introduced:

1. The scheme was intended to be revenue neutral - in effect for every winner there would be a loser

2. HMRC had the power to eject a business from the scheme "for the protection of the revenue" - ie. if good for client then client can't continue to use it if at HMRC's whim they (HMRC) so decide

3. Scheme was nothing to do with reducing liability but intended solely to ease VAT record keeping (undermined by some fine detail rules, as it happens)

NOW, I've never seen any reports of anyone being ejected from the scheme.

One thing that intrigues me is that I sometimes see comments that the FRS is "definitely better" for most or all businesses.  I usually find it works the other way, an example I looked at this morning would have had an annual VAT liability of £3,278 under FRS as opposed to £1,474 under conventional VAT accounting.  

I have found that the FRS benefits labour only consultants the most with the effect of the FRS on every other business only being marginal or rendering them worse off.

In my experience, the scheme can't possibly be revenue neutral - I have only seen it used when a saving is realised. If it generates a simplification in book-keeping then this is just an ancillary benefit, not the prime motivator. I would imagine this attitude is fairly common - if we can save money using it great but I will be dammned before I pay them a penny extra even if I will be up all night preparing the return.

I have also never heard of HMRC using their "protection of the revenue" powers. In fact, I have never heard of them disputing a trade sector % either despite some that are dodgy in my opinion although I understand it has happened.

 

 

 

 

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01st Jun 2012 22:56

Untrue

I have seen many types of business benefit by varying amounts.  Also can say it has been used to simplify particularly complex jobs where the money effect was marginal or slightly negative, saving on VAT/Accs bill more than makes up for this, almost every consultant under 150k benefits financially but if that is all you use it for, you aren't achieving full potential IMHO.

MtF

 

 

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05th Jun 2012 11:03

Not sure what you are disagreeing with

mackthefork wrote:

I have seen many types of business benefit by varying amounts.  Also can say it has been used to simplify particularly complex jobs where the money effect was marginal or slightly negative, saving on VAT/Accs bill more than makes up for this, almost every consultant under 150k benefits financially but if that is all you use it for, you aren't achieving full potential IMHO.

MtF

I can't be the only ones with clients who will only use the Flat Rate Scheme if they come out ahead. I do acknowledge that clients for whom the simplified calculations are of benefit exist. The only ones I can really think of are small shops & cafes with mixed rate supplies.

My point is though, that I can't see how the scheme does not "cost" HMRC a fortune. Does anyone have client who lose as much to FRS by as much as the generic consultants save? I would doubt it and even if there are some, they must be massively outnumbered - the PCG has alone has 20,000 members.

 

 

 

 

 

 

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09th Jun 2012 20:42

No, I don't know of any big losers, just marginal

Roland195 wrote:

mackthefork wrote:

I have seen many types of business benefit by varying amounts.  Also can say it has been used to simplify particularly complex jobs where the money effect was marginal or slightly negative, saving on VAT/Accs bill more than makes up for this, almost every consultant under 150k benefits financially but if that is all you use it for, you aren't achieving full potential IMHO.

MtF

I can't be the only ones with clients who will only use the Flat Rate Scheme if they come out ahead. I do acknowledge that clients for whom the simplified calculations are of benefit exist. The only ones I can really think of are small shops & cafes with mixed rate supplies.

My point is though, that I can't see how the scheme does not "cost" HMRC a fortune. Does anyone have client who lose as much to FRS by as much as the generic consultants save? I would doubt it and even if there are some, they must be massively outnumbered - the PCG has alone has 20,000 members.

 

 

 

 

 

 

So in that regard you are right, the point I was disagreeing with is that the flat rate scheme is for management consultants only, I have used it in over half the categories on the list.

Regards

MtF

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