We have a client who is a decorator on the Flat Rate Scheme for VAT because he always does private work and never does zero-rated new build. However, he has now been asked to do the decorating on a conversion from a multiple dwelling house to a single dwelling house, to which the reduced rate of 5% VAT applies. As he provides the paint (materials more than 10% of his turnover), his flat rate is 9.5%, so he will have to pay over VAT of 9.5% of (100 + 5) = 9.975%, having charged only 5%, and thus, he will be losing nearly 5% of his margin on the job. I am basing this on:
- the reduced rate for qualifying conversions applies to any sub-contractor working on the job, not just to the contractor who has the contract with the house owner.
- the reduced rate is compulsory, so the sub-contractor does not have the option to charge 20% VAT to a contractor who can recover it and charge only 5% to the house owner.
Am I right? Is this another pitfall of FRS?
Replies (1)
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FRS
Yes, that is a risk of using the FRS. There will always be winners and losers. In this case, the, FRS means the taxpayer overpays VAT.
Your two assumptions are also correct.