I have been with my current accountant since my limited company was established over 10 years ago and have only met him a couple of times, so it has been very much an email/phone relationship. During this period he has given me some good tax advice and I thought I was getting a good service until I was recently informed by another accountant that my company should be on the Flat Rate VAT scheme.
When the FRS was introduced back in 2002 my company turnover was too high to join the scheme so my accountant continued to produce accurate VAT return figures and my wife (who does the book keeping) would submit these.
It seems that a couple of years ago, when my turnover dropped below £150K my company should have switched to FRS, but I wasn't aware of this and my accountant has never advised me to do this. A quick calculation shows that my company has effectively overpaid VAT by many thousands of pounds as a result of this oversight.
Having raised the subject with my accountant he is in agreement that I should "now" switch to FRS.
I would like to know if there is anything I can do about this situation with regards to compensation? In good faith I have paid my accountant a monthly fee to "look after" my company. This includes producing the annual accounts, PAYE, quarterly VAT etc. AND provide good tax advice. Given that I supply my accountant with financial book keeping details on a regular basis, and that he produces my annual accounts I would have thought that it would have been obvious that my company should switch to the FRS some time ago. Had I not had a chat with another accountant, I may still be blissfully unaware of the fact that my company was overpaying VAT for years to come.
I would appreciate your comments.
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Replies (47)
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Can you share?
Can you share the quick calculation that you performed. I don't really work in tax much, but I understood most cases only show marginal benefits, rather than many thousands of pounds.
In any event should you have an engagement letter with your accountant, I somehow doubt that it will state that he is responsible for choosing the most appropriate VAT scheme for your business, and on that basis you don't have any real remedy as you would struggle to build a case for professional negligence. That said, if you discuss your grievance with him he may feel honour bound to compensate you in some way.
What you are highlighting is that the quality of accountancy firms is variable. Some will take an active interest in your business and promote ideas/schemes, others adopt a more passive stance. The absence of face to face meetings probably hasn't helped, but I would say the best thing you can do now is move on switch to the other accountant (or a similar one) who can live up to the expectations you have.
Blame the company director
I would seek to blame you, as it would appear that you were happy to have a product undertaken rather then a service. From my experience, I would imagine the fee paid would reflect this. Why did you not request an annual meeting with your accountant? We call it a tax planning meeting, however fees do reflect this, and in quite a lot of cases clients do not want to pay for it.
I am also rather confused, you state that in 2002 the FRS was looked at but your turnover was too high. Therefore you must have been aware that this scheme was in existence and should have considered what the turnover threshold was and when you would want to apply it.
You then go on to state that your wife undertakes the book-keeping, so the accountant would be in communication at least quarterly with her.
I would hope that you do not have a case, but you could always seek to sue the accountant.
I would like to ask you a question, would you have been prepared to have paid a higher fee for the last 10 years on the basis that the accountant was to look at the same issue year on year?
Winners and losers
'A quick calculation shows that my company has effectively overpaid VAT by many thousands of pounds as a result of this oversight.'
There are winners and losers where flat rate VAT is concerned. Are you positive you would be a 'winner'?
A quick calculation wouldn't be enough for me. I would need more than that before I committed myself to the change.
Figures
James,
Between February 2008 and July 2010 my total company turnover was £358,257. For the same period, my company has submitted 10 quarterly vat returns with a total of £48,024 vat paid. I calculated that on the FRS, the vat payable would have been £42,918, a difference of just over £5K.
Quick Calculation
Shirley,
I say a quick calculation, but it took me a few hours of scanning the web for the rules of what was included in the turnover figure (sales + bank interest, but not dividends) for my company and then building a spreadsheet containing the relevant figures. These were extracted from all the spreadsheets that were used to supply the data to my accountant and I then identified the applicable vat rates from February 2008 to July 2010. I also took into account the 1% discount for the first year.
I did supply this spreadsheet to my accountant and asked him to confirm that the figures and calculation were correct and that my company had in fact missed out on £5K+. It's interesting that after a couple of days I haven't had a reply to this specific question!
Figures
Not doubting your calcs but some areas to need to be careful with:
a) Choice of the "correct" FR percentage
b) The percentage is applied to the gross figure not the net turnover
c) Are you sure all income has been brought into account? - the income to which the FRS is applied is not necessarily the same as for normal VAT calculations. e.g. zero rate and exempt income must also be included (as must sale of cars).
Our messages crossed
but I would note there is no eligibility for the 1% discount as this applies from the date of registration not the date of adopting the FRS.
The Company Director Takes Responsibility
Chesterfield accounting,
I agree that as the Company Director I am responsible for my company's tax affairs.
I used this accountant as he was recommended by friends and was a specialist in the field of Freelance Contractors. Unfortunately his office is a 200 mile round trip, hence the lack of face-to-face meetings, besides, in this day and age, business can be performed via email and telephone.
I was aware of the FRS because my accountant sent out an email in 2002 explaining the rules and based on the turnover at the time it was obvious my company wasn't eligible. It wasn't until 6 years later that this situation changed as the economic climate deteriorated. Yes, I should have remembered FRS (or rather my wife should have remembered - I'll blame her as well) and that there was a possibility that my company would pay less VAT by using it, but I didn't, maybe because I was concentrating on running a business and I left that side of things to my accountant, after all, that's what I pay him to do.
You ask me "would you have been prepared to have paid a higher fee for the last 10 years on the basis that the accountant was to look at the same issue year on year? ". The answer is that I have already been paying an over the market rate for my account for the last 10 years as I believed he was one of the best for my type of business. I was prepared to do this because I thought I was getting excellent tax advice.
The reason I was talking to another accountant was because I'm now trying to cut costs in the business and changing my accountant is an easy way to do this. My accountant was the first to admit that it wouldn't be difficult to find a cheaper accountant, but warned me that I may pay more in the long term if I get bad tax advice. Well, it appears that even when paying a "good" accountant, a lack of good tax advice has the same effect!
You haven't overpaid VAT
From what you have said I don't think you have overpaid VAT. You have paid the correct amount of VAT for the VAT scheme you are on. That might sound pedantic but it is important if you are seeking to establish the liability of your accountant.
Did you pay your accountant to prepare such an analysis that suggests you should switch schemes? If not then he hasn't provided you with bad advice.
How sure are you that your analysis is correct? In my experience clients often need assistance selecting the most appropriate activity which of course drives the VAT %. Oh, and nearly always they forget that the % is applied to the gross sales and not the net! I trust you have not fallen for that.
It's is much easier to wise in hindsight, but who could have predicted with certainty what your actual VAT bill might have been for that period? Probably not you or your accountant.
EDIT - as Paul has said, you are not eligible for the 1% discount - how does that impact on your numbers?
-- Kind regards Andy
Gross, not Net
Hi Andy,
I take your point and I'm resined to the fact that my accountant has not done anything wrong, he just hasn't done all he could to minimise my company's tax bill, which is partly what I pay him for.
I have included gross sales in my calculation and my accountant has confirmed that I should NOW join the flat rate vat scheme. A little late perhaps, and only after I brought it to his attention.
Not eligible for 1% reduction
Hi Paul,
Thanks for pointing that out. I checked the HMRC site and it does say:
Reduction of 1% for new VAT registrations
If you are in your first year of VAT registration you get a 1% reduction in flat rate. This means you can take 1% off the flat rate you apply to your turnover, until the day before your first anniversary of becoming VAT registered.
I hadn't realised this, probably because it isn't made clear in the rest of their literature (no surprise there).
If I remove the effect of the 1% reduction, the amount of vat my company would have saved is now down to £3.5K. Not as bad as the original £5K figure, but still a lot of money, enough to cover the cost of my accountants fees for a few years ;-)
Could he have foreseen this?
As you will have guessed I think you are being a bit hard on your accountant.
Clearly the sales (and costs?) of your business, because of the recession and possibly other factors, have not been stable during this period. If it isn't stable, it isn't predictable with certainty so how is this the fault of your accountant?
It's so much easier to predict the past ;)
-- Kind regards Andy
Corporation tax
Has you also taken the offset of corporation tax.
If you are saying that the vat saying would be £3,500 by using the FRS, then I would also bring corporation tax into the analysis. The company profits would be £3,500 greater by your calculations and hence corporation tax would have been payable on that increase. This would reduce the advantage even more.
I would disagree with you on the meeting and engaging in an accountant that you are unable to meet. I see this all the time asan email can be taken in more than one interputation. A telephone conversation can also not be 100 useful. To me, even in today's technological age, a face to face meeting can never be beaten.
I have clients in Hertfordshire, and i travel down there to meet with them at least once a year. Its amazing what information I gleam from such meetings.
I would like to thank your for your replies to all the posts. From my experience on AccWeb, we do get quite a few clients of accountants, who see to want to blame the accountant for things, that simply are not their fault. Upon reviewing your replies (after my post), it is clear to me that you have done your due diligence work on this area. Although I would still stick to my comments both in my original post and my current post, I would dilute the first one a little on the responsibility issue. I think a lesson is learnt for the future and I do not believe you can beat face to face meetings. It would appear you have been caught by a, shall we say, a successful accountant, who probably has put profit before service.
Unfortunately, I would expect that he/she is a qualified accountant, and hence this has given you no confidence in the general reputation of qualified accounts. As you can see from replies to this post and other posts, there are always good accountants.
One final point I would like you to consider, you have looked at your vat workings over period using hindsight. Have you looked at the figures on a annual specific basis? In which year would the benefit have arisen and how much benefit would have arisen in that year? Then now ask yourself another question, what if you had looked at these figures in hindsight and seen that the FRS had generated a overall loss of £3,500, and your accountant had advised you to go on this scheme at the first opportunity. Would you now be posting a similar alternative query on this post. Sometimes, just like investments, you can only tell something has made a gain/loss with hindsight. Accountants and company directors do not have hindsight to their advantage. That is the unfortunate world of business. You also mentioned that the accountant had also given you good tax advice. I would now look at the overall position of all the advice, rather than just isolating just one issue and then move on to the new accountant.
Best of luck.
One further point
In theory being on FRS should reduce the accountants fee for pproducing VAT returns although this may at least partially be compensated by the extra time involved in accounts preparation.
My thoughts and thanks
Andy,
I have to disagree with you, I am not being hard on my accountant. I pay him a considerable amount of money each year and he hasn't given me best advice for the last 2.5 years. This is advice I got from another accountant after being in a meeting with him for 5 minutes. In order to give me good advice, surely he needs to spend a little time each year looking at the company accounts that his staff produce and he checks over. Had he done this I would have thought it would have been obvious what needed to be done. This isn't some obscure tax loophole, this is VAT, it doesn't get much simpler and there are only two options for my company.
My company provides a service to a small number of clients and contract periods are usually between 3 and 6 months, so in this respect there is a lot of predictability. If I look at my company accounts for the last 10 years, turnover has been the same up to 2008 when it reduced and has since been at that reduced level. Nobody can forecast what will happen in the future, but just as he has now "advised" me to switch to the flat rate vat scheme, he should have advised me to do this a couple of years ago as the information he has now is no different to then.
Hi Chesterfield accounting,
Thanks for pointing out the affect of Corporation Tax, which would affectively reduce the "loss" by 21%, so the company would only be £2,765 better off, which is nearly half my original estimate. Still a considerable amount, but more palatable than £5K.
I understand what you are saying about hind sight, but it was clear to me in 2008 that business income would be reduced and has not risen since. By the end of the 2009 company year at the latest, this should also have been apparent to my accountant as that would have been two straight years with a turnover considerably less than £150K. This weekend I sent the flat rate vat scheme registration form to HMRC as I have forecast the situation will not change for the foreseeable future.
geoffmw,
My accountant charges a fixed monthly fee, which includes the preparation of a VAT return, regardless of how much effort he has to put into this, so it doesn't make any difference to his charges. I say "he", it is clear from experience that his staff produce the VAT return figures and on a number of occasions I have had to challenge them, only to be told I was correct and that something had been missed out. This doesn't usually affect the net VAT to be paid, but some of the other "information" figures.
In a word, 'No'
Your original question was:
I would like to know if there is anything I can do about this situation with regards to compensation?
Refer back to your letter of engagement and invoices he has supplied for services. If you did not engage him to prepare the analysis and he did not charge you for the advice he never gave, I do not see how you can expect him to admit liability.
You have come up with detailed analysis which, on only the basic evidence you have supplied is flawed, and only obtainable with the benefit of hindsight.
FRS is a scheme designed to be simple for meeting VAT obligations (although it doesn't always succeed). It is not meant to be a means of reducing the tax burden, but understandably there will be some winners and losers upon adoption. Maybe, in the current economic climate joining the scheme to avoid tax will become illegal!
I can understand you are sore and that you feel you have not had best value for money. Your accountant has done nothing wrong but not done everything right to meet with your approval and on that basis I would understand if you appointed another accountant. But compensation? I don't think so.
-- Kind regards Andy
Advice given after 5 minutes study of situation - suspect
"This is advice I got from another accountant after being in a meeting with him for 5 minutes."
I would be very surprised if 5 minutes was enough time to come up with a reliable opinion on the alleged VAT saving by moving to FRS. Factors such as future changes to capital assets would be relevant - if this question was not asked then the answer to this question could have a serious impact on the figures - not just purchases of assets but sale of assets (cars have a nasty hidden penalty under FRS when sold, it appears!).
Then there's the changes to the accounting records necessary for joining the allegedly "simpler" FRS VAT accounting. Plus, the change back to conventional VAT accounting if the business outgrows the FRS.
PS. When working out the alleged saving, as has already been pointed out (but not answerred / replied to?) is the point that the FRS percentage is applied to the gross-VAT-inclusive turnover (not the VAT exclusive turnover per the accounts) needs to be factored into the "benefit of hindsight" back of an envelope calculation of alleged VAT saving that's been "lost".
Also the FRS VAT liability percentage is applied to ALL of the business income (not just the turnover) - eg. bank interest received, rental income and other sundry income (things not subjected to VAT liability under conventional VAT accounting). It also is applied to VAT zero-rated sales and VAT exempt sales.
I assume that HMRC's power to remove you from the scheme "to protect the public revenue" (*) was pointed out to you.
(*) Never heard of it happening but I believe that HMRC can remove you from - or refuse to let you join - the FRS if they perceive a significant loss of VAT liability.
Just come into my in tray from my ATx investigation guys
May also be worth considering:
"On 1st January 2010, when VAT reverted to 17.5%, not all Flat Rate Scheme (FRS) categories returned to their original levels. We are aware that HMRC have been selecting companies using this Scheme as a potential source of errors. It may well be that HMRC will make similar checks following the increase in VAT to 20% on 4th January 2011 and so we have published the new rates, the key issues to be considered at the time of the increase, as well a brief summary of the anti-forestalling legislation."
It's not rocket science
DMGbus,
I appreciate that accountants are highly qualified professionals, but trust me when I say my IT consultancy business is as simple as it gets, and after 5 minutes of looking at my latest annual accounts I'm sure that even Forest Gump would have come to the same conclusion!
The advice offered wasn't that I should run off and immediately switch to the FRS, it was that I should consider switching after confirming that it would benefit my company.
This I have done by performing some calculations and checking with my existing accountant, who has agreed the FRS would be better.
I would hope, that even if my calculations weren't entirely accurate, my accountant would have performed his own before advising me, or should I say, agreeing with me. I can confirm the calculations did include VAT inclusive turnover and bank interest.
You say 'I assume that HMRC's power to remove you from the scheme "to protect the public revenue" (*) was pointed out to you.', so now I'm confused. Maybe my company shouldn't join the FRS just in case HMRC decides to remove it. Maybe I should contact HMRC and ask them if they are likely to remove my company from the scheme before I submit the registration form to join the scheme. I guess I should also inform them that I think my company is likely to pay less VAT under the flat rate scheme just so they are clear about why I want to join it. I suppose at the same time I could advise them of the tax avoidance measures my company is taking and ask if I should stop following my accountants advice on these. Sorry for the sarcasm, but it was a rather silly comment, although I'm sure you meant well.
FRS Scheme
So in effect you expect your accountant to prepare your VAT return each quarter using your existing scheme and also any other VAT scheme that is applicable to your business and advise you on the most cost effective basis each time. This kind of negates the point of the flat rate scheme which was merely to simplify the preparation of VAT returns for small business owners who prepared them themselves. Your gripe is that the simplified method should be used as well as the full method. So the simplified scheme is another complication, not a simplification.
That being the case would you be prepared to pay him for the extra time involved in producing the calculation each quarter and also the extra charges involved in moving into and out of each scheme?
I would think that most of us would only consider changing to a different VAT scheme at the time the annual accounts were prepared, and then a recommendation would need a forecast of future years performance. Difficult to predict the future with certainty.
Again I would re-iterate what a previous poster pointed out - you have not overpaid VAT. You have paid the correct amount, it is just that an alternative scheme may have resulted in you paying a slightly lower amount.
Embarrassed
Millieniumaire
I've followed this thread and the reponses you've received, and I have to say I am very disappointed by the closing ranks that appears to be occuring here by what, I presume, are working accountants/tax advisers. The final straws were the last 2 comments - these have annoyed me so much that I've joined accountingweb just to respond.
Your present accountant owes you a duty of care, and I really think he has fallen short. It is only the review by a fresh pair of eyes that has pointed out the POSSIBILITY that a change in VAT scheme COULD provide your business with VAT savings. Further work may be necessary - that is a given, but not an excuse for not pointing out the opportunity. I take the point that its difficult to forecast the future, and your estimates may have been out, but some of the comments are throwing it all back at you as the company Director (and your wife!!). ??? What's that about? My clients would not accept the blame, and I wouldn't expect them to. They pay me to ADVISE them.
If you weren't paying your present adviser to prepare the VAT returns then he MAY have an excuse for not advising you until he had the accounting records after the year. But he gets them every quarter. He should be thinking 'what can I do for this client? Turnover is down.... umm ... pro-active... ask a few questions, have a chat on the phone... see where is business is going'. To say rubbish like - 'you're only paying him to DO the VAT Returns' is NO EXCUSE. As I see it, he's been happy to take your money - do the basics, and has missed an opportunity for you. You can't even say that hindsight is being used here. After a 6 month period of markedly lower T/O a pro-active accountant would/should be thinking 'is there another way'. Again - give the client the opportunity to discuss how he sees the future.
Being realistic, and being in practice, I believe things like this get missed often (I'm sure I've done it), and very few Accountants are really on the ball enough to deal with these things at the optimum point. But going to YOU with the idea or option is far better than a 3rd party pointing it out to you. If I were your accountant I would be embarrassed that you had approached me with the figures. I'm sure he is - but unlikely to admit it.
On the subject of FRS, apologists here are quick to warn that it has its foibles - but they are mostly red-herrings, eg Bank interest is a supply - at recent interest rates, big deal - Cars - in a one-man company, unlikely. Your company probably fits the bill better than most. As is rightly pointed out, the scheme isn't designed to give you a profit - even if you break even in terms of VAT, at least the VAT Returns are generally quicker an easier to prepare. There are always exceptions - but these have been pointed out to you in detail by the earlier respondents.
At the VERY LEAST your Accountant should be big enough to admit that he was not pro-active enough, and could have suggested the scheme at at earlier point (EVEN IF, AFTER INVESTIGATION, BY HIM/YOU IT WAS DECIDED THAT IT WAS NOT BENEFICIAL). If he has any sense of duty he should look for a way to regain your goodwill and trust, as you were quite happy with his advice before this point. I'm sure some acknowledgement on his part could go some way to repairing relations.
You have paid for a service - the skill and expertise of this profession - and you haven't received it.
I've probably ruffled a few feathers here, but no apologies.
JonnyB
Agree JonnyB
"What scheme is the client on and would a different one be better?" is on our accounts prep checklists as are
"Should this Soletrader/Pship incorporate?"
"Should this company be wound up?"
Simples
@ JonnyB
The OP's question was about compensation not an apology.
You don't appear to be suggesting that the accountant should offer the OP a sum equivalent to the amount they think they have lost. In which case your conclusion is no different to all other posters.
-- Kind regards Andy
FRS ,VAT and 'no' advice!
As a tax specialist I would have expected that the accountant involved would have looked each year to see if the best system was being used....or should I say the junior doing the job! There are a lot of so called freelance specialists- it's a nonsense term and means little.There are a number near my practice who treat the accounts for such work as 'sausage machine jobs' -their term -not mine!
It's fine to blame the directors but most small company directors need a element of handholding and guidance is part of the contract.
FRS Scheme?
What line of business are you in? Do you invoice your client sales plus VAT or are your sales VAT inclusive at point of sale? All depending what line of business you are in would effect what your input tax was i.e. a cafe or a restaurant would have low input VAT figures. Another thing to look at are fixed assets purchased in the years you are looking at, if you have a lot of fixed asset purchasers under £2,000 including VAT you would possibly losing out under the FRS scheme.
Do you not all check FRS as a matter of course?
As posted above, we have this on the accounts checklist, every client who can qualify for the scheme is checked through to see if there is any benefit, which is a rare occurance, but there is no excuse for not checking.
One of the main reasons for introducing this was due to the number of PI cases where clients sued accounts for not advising to change, this was brought up as a potential problem on an ICAEW course so is a very real issue.
So I would say to all the accountants on here given your answers get a system in place to stop this happening to you, and to the original poster, if you feel really strongly and are certain of your figures then take it further, the accountant has a case to answer. If you are happy with the rest of the service maybe suggest next years accounts are pro bono, might work.
FRS scheme advice
It seems to me that the main problem is the lack of face to face meetings. Clients who meet with their accountant regularly have a much more personal relationship with their accountant and it is then much easier to pick things up earlier and to offer more proactive advice. My worry is that you were prepared to pay more fees for an accountant who lives 200 miles away because he stated he was a specialist. If your accountant is qualified then he is a specialist by definition - there is nothing in your accounts which any general practitioner could not deal with. If you have completed one set of accounts for a particular sector you could call yourself a specialist and it is often just an excuse to charge higher fees.
Choose yourself a local accountant who can spend the time getting to know you and your business. But do not expect the proprietor or partner to complete all of the work themselves as we all have to rely on staff to produce the figure work - however your accountant should still have an inside knowledge of what is contained in your figures and what is going on with your business.
@ Andy and others
Wrong, Andy. I DO think the accountant is at fault - he has a case to answer. I do not agree with 80% of the ealier posts. I do not think that the OP is being a 'bit hard' (your words) on his present adviser.
The compensation may be financial, perhaps offering a reduced fee for future work, or it may be verbal/emotional - at least acknowleding the issue - and reaffirming the commitment to a duty of care under the letter of engagement.
In this case, the VAT at stake is probably makes it unlikely that its worth the OPs time and effort taking it further.
@ later posters today. Thanks for posting - there are pro-active, thoughtful accountants out there willing to put a bit of effort in.
you would have to check following first
Dear Milleniumaire,
What line of business are you in? Do you invoice your client sales plus VAT or are your sales VAT inclusive at point of sale? All depending what line of business you are in would effect what your input tax was i.e. a cafe or a restaurant would have low input VAT figures. Another thing to look at are fixed assets purchased in the years you are looking at, if you have a lot of fixed asset purchasers under £2,000 including VAT you would possibly losing out under the FRS scheme.
Changing from FRS to standard method.
What if client is on FRS already? Should accountant then examine every prime document to determine whether they might be better off with standard accounting?
Also - as an earlier poster pointed out - you can only be certain of the benefits, or not, of FRS after the event - as the levels of input VAT will vary.
The original poster was aware of the FRS from the outset - and does own bookkeeping, and will have a better idea of future expenditure - so why not do their own calculation as they went along?
Would you say a stock broker would be at fault for not advising purchase of what subsequently turn out to be the best invesments?
FRS was designed to save time, not money. There will be winners and losers - and I think the poster was aware of that from the outset - and so the accountant will have done their bit by making the client aware.
" this is VAT, it doesn't get much simpler"
Nice sound bite, but could not be more wrong. VAT is far from simple. A little knowledge is a dangerous thing.
“Beyond the everyday world … lies the world of VAT, a kind of fiscal theme park in which factual and legal realities are suspended or inverted.” (Lord Justice Sedley; Royal & Sun Alliance Insurance Group plc v Customs & Excise Commissioners [2002])
Snuggle up!
The preparation of a VAT return seems to be treated as a bookkeeping exercise but I don't think it should be. It's more akin to a corporation tax return, just done more frequently. VAT is not a simple tax either, though the calculation of it may be straight forward. The VAT treatment of catering and food (hot or cold?) drives me mad!
In my opinion, an accountant preparing the VAT return each quarter should be aware of the possibility that the client might benefit from a particular scheme. If it's not explicitly set out in an engagement letter, I think it's incumbant on the adviser to do this and make the client aware.
I would also suggest that in most cases the FRS should not normally be adopted on the basis of one quarter's figures. It is not always simple to operate and the decision to use it should be done with care. You can't go back into the scheme if you've come out of it in the previous 12 months so you should be pretty sure it's the right thing to do and the right time to do it.
Once in, use of the FRS should be monitored to make sure it continues to be the best option but this does mean you still need to track your input tax properly, negating the idea that it's an easier way to account for your VAT.
I don't think the distance or lack of face time makes any difference per se. Accountant seems to me to have erred though probably not by the amount you think, milleniumaire. If there's a good relationship and you want to maintain it, then you have a moral claim; no idea whether you have a legal one. Your story is why you should want to snuggle up to your accountant, not shun him!
Flat rate scheme and micro-businesses
For the consultant who fits into the 10.5% 'none of the above' service company and who works from home using their own car and claiming mileage allowance, then the FRS is going to be beneficial 99.9% of the time.
These businesses have precious litte input VAT (telephone, stationery, accountancy fees.....struggling a bit after this) and even if they need to replace a computer from time to time the irrecoverable input VAT would be more than made up for by the benefit of charging 17.5% of the net fees and expenses and only paying over 10.5% of the gross amount - the benefit is 5.1625% of the net fee on the invoice each time).
As for the FRS making the bookkeeping and accounting more difficult, I don't buy that at all. Record all expenses gross, record all sales gross and reduce sales by the FRS liability each period (Cr VAT control account, Dr Sales).
Businesses in this kind of situation can increase their profits by thousands of pounds each year before corporation tax. This is not the intention of the scheme of course, but HMRC admit there will be winners and losers so it would be a bit harsh for them to forcible de-register a trader from the scheme because they were big winners. I've not heard of this happening.
It is possibly also worth pointing out that once registered under the scheme you can stay in it until your taxable turnover exceeds £225,000 (rising to £230,000 from 4 January 2011).
For the OP, you can ask HMRC to register you for FRS with effect from the start of the current quarter and they are generally happy to do so. I am surprised you had to complete paperwork for it - I phone the HMRC VAT Helpline and they did it all there and then over the phone - I was surprised but impressed.
Malcolm Greenbaum
Director, Greenbaum Training and Consultancy Training Limited
IFRS, US GAAP, UK GAAP, UK Tax and VAT
Thank you
I confess I was feeling a little battered and bruised from some of the responses I had gotten and was beginning to think that maybe VAT advice isn't something I should expect from my accountant in the same way as good tax avoidance advice.
Thanks to JonnyB, Sue, Petew and AdShawBPR for balancing the argument that my accountant SHOULD consider VAT and not leave it up to me as company director.
I don't think I ever really believed I would have a case to claim compensation from my accountant and now that I've had a week to think about it (and revise my calculations based on information provided through this forum) it's no longer an issue and I'll just put it down to experience.
However, if I wasn't sure about my decision to change accountant before, which was primarily driven by cost savings, I am sure it is now the right thing to do as I do agree with Karen that I need to have more of a personal relationship with my accountant and to meet with them regularly, something that hasn't happened with my current accountant.
Interestingly, during a meeting I had with another prospective accountant the other day, company investments were mentioned as a reason why not to join the flat rate scheme. Based on advice from my current accountant I have always left most of the profits in the company and only taken out only what was needed to live on. These profits were then invested, within the company, into managed funds. Consequently, after 10+ years this has resulted in a large amount of dividends being reinvested (within their respective funds) each year. The ultimate plan was for the company to turn into a pension pot and to continue drawing dividends from it when I retire (which is a long way off).
Apparently, while investments in ordinary shares are not included in FRS, investments in funds are, both in terms of their dividends and any proceeds from their sale.
As an aside, the accountant I met suggested that it was very unusual for me to invest money through my company rather than withdrawing it and investing it personally. None of his other clients did this (at his advice)! Obviously, this is a whole other area and has nothing to do with FRS, but I only mention it to show how varied tax advice seems to be and this particular advice was completely the opposite to what I have been told for the last 10 years!
Back to FRS, I spent hours this evening trying to find information on how investments funds should be treated in the FRS, but failed. I even tried calling the HMRC VAT information line, but despite around 10 attempts over a period of 2 hours I couldn't get through to anyone as they were too busy.
chatman, obviously my sound bite was wrong. For a company like mine VAT accounting the "long and complicated" way seems to be more simple than the FRS way, which is laughable as FRS is supposed to simplify the process. What it does potentially give my company is a means to reduce the amount of VAT to be paid, as Malcolm explained in his post, so I believe it could still be useful, providing I get the turnover calculation right!
Ermintrude, I could tell you how much I pay my accountant, but then I would make all the accountants on this forum jealous, so I'll keep that information to myself if you don't mind ;-)
AdShawBPR, having spoken to an acquaintance of mine, who is also a client of my accountant, he tells me that he is on the FRS, but he maintains complete VAT records so that he can compare the two VAT methods to ensure he isn't over paying. This is something I was also planning to do and for a company like mine it doesn't require much effort, if any extra at all.
I would be interested to get feedback on the inclusion/exclusion of investment fund dividends/sales proceeds in the FRS turnover calculation. I don't understand why they would be treated any differently to ordinary shares (but then I'm not an accountant). I will attempt to get through to HMRC tomorrow and if I do I'll post what they say.
It has crossed my mind that this may be going off topic, however, if the investment fund issue turns out to be correct and negates the use of FRS (for my company), then it will show that my accountant was correct all along, even if he didn't know it!
whole different ballgame
your explanation of the finances of your company changes the whole aspect of your original question.
There is the possibility that your current accountant knew all alomg that FRS was not right for your company,but didn't feel the need to explain a negative to you.
However what this does show is that any course of action requires consideration of all the pros and cons. Have you for instance considered the additional cosy of personal tax had larger dividends brought your personal tax rate into the 40 % bracket and therefore given you less money to invest?
Lack of communication
Geoffmw,
You may be right about this being the reason, but if so why has my accountant agreed that I should join FRS and if the investments are an issue why hasn't he told me so?
I'm not sure what you are saying about personal tax etc. We always tend to pay some personal tax at 40% due to the amount we draw from the company each year, however, if we were to draw all the profits out of the company every year it would amount to an awful lot more personal tax at 40% (or the difference between the personal tax rate and the corporation tax rate). I seem to recall this was the main reason given all those years ago by my accountant to leave profits in the company.
You don't say if you have any knowledge of the impact of investment funds on FRS. If you don't then how can you conclude that these investments have an impact on the original question?
VAT Help line
I finally managed to get through to the HMRC Vat help line and I was told that dividends and sale proceeds from ordinary shares or managed funds do not need to be included in the turnover calculation.
I plan to write to them to get confirmation of this in writing to avoid any doubt in future VAT inspections, but this appears to exclude this as a reason for not joining the flat rate scheme. Is this a case of an accountant not being knowledgeable enough in this area or is it possible the VAT help line have it wrong?
I can see from previous forums that the question of including bank interest in the FRS turnover calculation cause a lot of confusion, not only to accountants, but to HMRC also, but this now seems to have been clarified. Maybe managed funds is yet another area of confusion, although ordinary shares do appear to be specifically excluded.
Danger of Help Lines
If you are very careful to express your question with absolute precision, there is a chance you will get the wrong answer.
If your question is potentially ambiguous, confused or omits a point that the questioner would not even recognise as relevant, you are almost certain to get the wrong answer.
-- Kind regards Andy
VAT Helpline
When calling the VAT helpline always ask them for references to legislation or other text so that you can check it out afterwards.
The VAT helpline once told a client of mine that she didn't know why he wasn't on a cash accounting scheme to help his cashflow, when he said that his accountant (me) had told him his turnover was too high - she said that she was unaware there was an upper limit to the cash accounting scheme. Client rang me really annoyed that I had apparently been giving him the wrong advice - his turnover is approx £3.5m and yes the upper limit of £1.35 m still applies.
So by all means use them but definetly find out where they have got their information from.
Reference to notice 733
Sorry, I should have said that when I called the helpline I was referred to section 6.3 of notice 733 regarding the exclusion of dividends, which says:
6.3 What income do I exclude from my flat rate turnover?
You exclude from your flat rate turnover:
private income, for example income from sharesthe proceeds from the sale of goods you own but which have not been used in your businessany sales of gold that are covered by the VAT Act, Section 55 - see Notice 701/21 Goldnon-business income and any supplies outside the scope of UK VAT andsales of capital expenditure goods on which you have claimed input tax.
I guess the relevant detail is:
"private income, for example income from shares"
I confess, as a layman, I'm slightly confused about how it is possible to have private income from shares that are invested through a company. In my case the investments were made by the company and in the company's name so they belong to the company. Doesn't that therefore mean the income IS NOT private and so the above statement doesn't exclude the income from being included in the turnover calculation? My head hurts ;-)
Not surprised your head hurts!
From what you now say, your business appears to consist of two separate and distinct "trades". The original one of being a Contractor, and the second of dabbling in shares/investments. Are you sure how HMRC view the investment activity? Is it a trade? If so, does the buying and selling of investments within the company constitute turnover? If under the FRS scheme would this attract VAT? If the turnover from this activity exceeded that from Contracting, is your flat rate scheme VAT rate now different from the rate you thought it should be? If categorised as turnover, are you still below the £150k threshhold for entry into the scheme, or above (or soon likely to exceed) the exit level?
There are an awful lot of variables here. I am also concerned that your FRS "benefit" is somewhere around the £3,000 level on turnover for the period you quoted of c£350k. That is a 1% benefit, and I just wonder whether this is a large enough margin to plump for a different scheme, when you are not sure what you will be doing as your contract is subject to change every 3 to 6 months. Forget hindsight, at what point over this period would you have jumped? - and that is before considering the trading in investments angle!
This all shows the value in having regular (and meaningful) contact with your adviser.
Only one trade?
Hi Aidan, thanks for your feedback.
I understand where you are coming from, but if I throw a few more figures in the pot I hope you'll agree that my business would not be seen as having different trades.
During the last company year, net sales were approximately £120K and I would guess bank interest was around £2K. The reinvested dividends for the managed funds for the year were around £6K. As you can see the bulk of the income is generated from sales.
Investments in the company total around £370K and this is currently a gain of £50K (last year it was £-2K). Yes, there is a considerable amount invested in the managed funds, but surely this doesn't make it an investment company due to the relatively small returns.
If I had simply left this as cash in the bank to generate interest that wouldn't change the company's trade status, so why should investing have this affect?
Investment company
Unless you can show that the £370K value of the funds invested are being held to invest in a trade or rental income business ,
the investment income is technically taxable at the full 28% Corporation Tax rate. As your company is a close company, (fewer than 11 shareholders) you run the risk (admittedly small) of being required to treat most of the reinvested income as adistribution with the consequences of personal taxation being increased.
Automated
I would have expected you accounts chappies to have an FRS comparator built in to your VAT spreadsheets ! !
Spreadsheets?
............a "bluuunt little tool" for a professional to be doing VAT returns with.
jealous accountants - why?
You say:
Ermintrude, I could tell you how much I pay my accountant, but then I would make all the accountants on this forum jealous, so I'll keep that information to myself if you don't mind ;-)
But you also say:
If I remove the effect of the 1% reduction, the amount of vat my company would have saved is now down to £3.5K. Not as bad as the original £5K figure, but still a lot of money, enough to cover the cost of my accountants fees for a few years ;-)
If the £3500 could save you a "few" (i.e. at least 3) years of accountancy fees, that means you're paying no more than just over £1150 per year for full tax advice, vat returns, annual accounts etc.
Sorry but I'm not jealous. It's not "cheap" but probably below average for a company of your size.