Flat rate scheme

Flat rate scheme

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Can anyone tell me what is wrong with this? Am I missing a trick?

Subcontractor – Turnover gross £30K pa

Apply to be vat registered – go back four years. Has only had a couple of customers, who have agreed to the VAT only invoices.

He also applies to join the flat rate scheme. Rate has varied but say 8.5% on average (general building/ construction services).

So Vat paid to him by customers – assume 20% for all 4 years – 30,000 x 20%  x 4 = £24,000

Liability under flat rate scheme – 36,000 x 4 x 8.5% = £12,240

Net refund - £11,760

According to Tolley’s –

“The provisions allow a person to negotiate registration from a date prior to the date of application provided this is done at the time of initial application and not subsequently after registration” [59.2]

And re the flat rate scheme:

“The certificate issued by HMRC is effective from the date on which the application is received ….or it may be such earlier date as HMRC agree to”.[63.28]

Thanks.

Replies (5)

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By Cloudcounter
18th Jun 2013 12:46

Check the flat rate

The VAT flat rate applicable to a labour only subcontractor is 14.5%, not 8.5%

Reduces the "profit" although it's still £3k, but subject to tax and NI

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By robvaughan
18th Jun 2013 14:40

Thanks that does make a big difference - as you say still a reasonable saving though!

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By mabzden
18th Jun 2013 17:48

Backdating Flat-Rate Registration

You could struggle to backdate the Flat Rate registration. I've contacted HMRC about this a few times in the past, usually only wanting to go back one period. It's not an automatic right and they think about it and let you know a couple of weeks later whether they've accepted the application. So the part of the Tolley quote where it says "such earlier date as HMRC agree to" is quite important.

In your case, if they work out agreeing will mean writing out a cheque to your client for £3K they may not be too keen.

If HMRC turns down the application to join the Flat Rate Scheme your client will only be able to reclaim the actual VAT on his business expenses, and I should imagine this doesn't amount to very much for a labour-only subcontractor. So you and your client could end up going to a fair amount of trouble for very little (if any) benefit.

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By amgirling
18th Jun 2013 20:21

Flat rate works, standard would not

The above does work in principal (dependent on cashflow from the customers paying the VAT) but hinges on FRS being able to be retrospectively applied.  If not when considering the administration required to go through the documents to correctly account for the VAT on purchases would likely outweigh the VAT saving (if labour only with few reclaimable items for VAT)  I agree with mabzden that HMRC are less likely to be co-operative on the backdating of FRS if they feel they would be dramatically losing out. 

Also does the builder do any new build residential work?

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By mikeyban
18th Jun 2013 21:19

Builders are the one industry in my opinion should be very wary of flat rate scheme.

No consistency with level of materials and zero rating is problematic...

Also two flat rates in this industry...

Be careful!

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