Flat Rate Scheme for Sole trader & Rental Income

Flat Rate Scheme for Sole trader & Rental Income

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I have a sole trader client that runs his own consultancy business and is registered for VAT using the Flat rate scheme. He recently acquired a Buy-to-let property where the annual rental income is expected to reach £12,000.

Having read the guidance from HMRC manual and subsequent research into this tax case www.financeandtaxtribunals.gov.uk/judgmentfiles/j5326/TC00958.doc

I am of the view that all business income arising from the same entity i.e. rental income must be included in Box 6 of the vat return and the relevant FR% of tax paid on the gross amounts. This is irrespective of the fact that rental income on residential property is exempt.

i shall be grateful if other readers can confirm this ruling.

Thanks

Aggrieved !

   

Replies (16)

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By User deleted
28th Nov 2013 15:08

I can confirm

It is one of the well-known drawbacks of FRS (but then, HMRC need to somehow recover all the VAT they're losing through traders using FRS simply to save VAT)

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By Chesterlad
28th Nov 2013 15:56

move the consultancy business into a ltd company?

couldn't you move it into a ltd company, close down the VAT reg for the sole trader and start up a new reg for the ltd company.  Then the rental income wouldn't have to be reported on the VAT return?  Additional cost may be worth it, if it is allowed

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By S.K
28th Nov 2013 16:06

Yes already started the motions for setting the Ltd Co up to segregate the two entities.

Many thanks 

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By rampanesar
28th Nov 2013 17:03

LLP with wife?

I would set up an LLP with wife as a low % partner - or whatever is beneficial but if the business income is high enough, then as you are incorporating, that would do avoid the problems.

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By Deborah Hindson
02nd Dec 2013 11:44

Flat rate scheme

I have a client who runs a B&B in partnership with her husband and who also has several but to let properties. I raised this with HMRC and I have an email on file from an HMRC inspector who is happy for the flat rate scheme to be used for the B&B income without including the rental income in the calculation.

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By Deborah Hindson
02nd Dec 2013 11:49

Sorry

Should say buy to let above.

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Replying to lionofludesch:
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By Malcolm McFarlin
02nd Dec 2013 11:59

Misdirection

Deborah

I would preserve that e-mail if I were you since the HMRC officer is clearly wrong. Hopefully you will have a strong case for misdirection as and when the situation arises.

 

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By User deleted
02nd Dec 2013 12:02

Malcolm

Why do you think HMRC are wrong, given that the B&B business is run as a partnership?

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By Huw Williams
02nd Dec 2013 12:09

B&B in partnership

Deborah. 

You say the B&B is a partnership, but dont say the lettings are joint with husband.  If the lettings income is just hers then HMRC are right - there is a different legal entity and so FRS does not apply to the rents.

If the rental income is joint then HMRC may be wrong, but that does not mean that you can continue to get the VAT wrong going forward.  Now you know it is wrong I think you need to do something about it.

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By Malcolm McFarlin
02nd Dec 2013 12:16

Thanks Huw

I agree with your line of thought

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By Deborah Hindson
02nd Dec 2013 12:17

Rental income is joint

The rental income is in joint names also. I didn't make that clear. As you rightly say I need to do something about it.

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By User deleted
02nd Dec 2013 12:23

Deborah/Huw

You may well be right (in that you may need to take steps), but for the avoidance of doubt perhaps you would confirm that the partnership is not a Scottish partnership.

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By Deborah Hindson
02nd Dec 2013 13:50

BKD/Huw

Thanks for your advice so far. The partnership is not a Scottish partnership. I think the wife should leave the partnership and I should register the husband for VAT and decide whether to transfer the VAT number. The reason for the husband taking over the business as a sole trader is he is over 65 so no Class 4 NIC.

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By cfield
02nd Dec 2013 16:29

Don't think being Scottish makes any difference

Yes, a Scottish partnership is a legal entity in its own right, as opposed to a non-LLP English one that isn't, but I don't think it makes any difference for VAT purposes, as it is the trader that counts. A partnership is a different VAT trader to the partners themselves because they are trading as a couple, not because it is a separate legal entity.

Other points - the VAT registration of the new company would be a TOGC so you need Form VAT 68. Could trigger penalties if you overlook this.

Also, the new company should get the 1% introductory discount for the FRS, but make sure it is not closely associated with another business or it may not be allowed to join. That means having financial, economic and organisational links. Very rare to get all 3 though.

Don't forget to put something on the loan account for goodwill. Shouldn't really do this if all the goodwill of the sole trader business attached to the propreitor (or the premises in some cases) but I'm sure you could get away with £10,900. HMRC insist that the capital gain must be based on open market value anyway between connected parties, so we're only complying with their wishes!

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By User deleted
02nd Dec 2013 17:07

Being Scottish does make a difference

"Because a partnership in Scotland is a legal person or legal entity, each separate business carried on by the same partners may have a separate registration, so that Mr and Mrs X may have six retail outlets and treat them as six different partnerships, even though Mr and Mrs X are the only partners in each partnership. However, you should only allow separate registration where it can be shown that there is a separate partnership agreement for each of the businesses."

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By cfield
02nd Dec 2013 17:23

But only for mutiple partnerships

I see what you're getting at BKD. I was thinking of the sole trader + partnership scenario, rather than multiple partnerships. However, easy to get round with LLPs if you don't want a company.

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