A client operates a gardening business (or similar) under a franchise and may have to register for VAT so I have being looking into FRS. Since there is no FRS category for gardening I have assumed it would be Activity not listed elsewhere, so 12%.
Another franchisee has been on the FRS under Retailing not listed elsewhere at 7.5%. He has been subject to an audit and the rate was not challenged. However I am not able to see how he can substantiate this rate.
VAT helpline would not guide me to a rate and said that the client picks the one for them - however they did say retailing is selling goods and I agree so I am advising client to use 12% rate but is is hard if a colleague is using a different rate.
Anyone have experience of advising clients which flat rate to use?
Replies (12)
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Flat Rate Scheme
If the business is gardening, not a garden centre, then I don't think retailing is appropriate. I have looked through the list (http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm#5) and conclude that 'Activity not listed elsewhere' is fine.
The key is that the choice is reasonable. If so, then HMRC cannot backdate any change to the category.
Per VAT CPD course advice..
I think it was Neil Owen - who has been lecturing on VAT for CPD for many years, who stated that if you can't find a really good match for the business concerned, then you should choose "Activity not listed elsewhere" and not try to argue that your business fits into another category.
You may of course have to justify this argument to HMRC, but there are so many businesses that don't fit into any of their categories that this is the easiest approach and I feel a whole lot better since I've adopted it.
What I do is call up the more detailed trade sector list at:
http://www.hmrc.gov.uk/manuals/frsmanual/FRS7300.htm
and then search the page for relevant keywords - "gardener" , "gardening" in your case.
If nothing comes up then it's either "Any other activity that is not listed elsewhere" or "Business services that are not listed elsewhere" choice (but these are both 12% anyway).
FRS Trade Sector list
thanks for the link to that list. It is so much better than the one in the Public Notice. I must not lose the link!
Risky proposition
Do you have proof both that the other franchisee is using 7.5% and that HMRC have looked at this and not challenged the rate?
If so, you could "justify" using the same lower rate on that basis. If your client is queried, you can point to HMRC tacitly approving the lower percentage.
Potentially risky, as I cannot see how it can be justified either on the information given. HMRC can back-date a change of rate if they believe a lower rate was chosen without adequate justification.
It's pretty clear that the lower rates are more for retailing and manufacture (ie businesses which have 'purchases'), and the higher rates are for service businesses.
As 'gardening' is pretty much a service, then it would be logical that a higher rate would be more suitable, and certainly not 7.5%.
assumption
One of your assumptions is that the VAT inspector actually understood the business he was inspecting, and then accepted the 7.5% rate.
Silly assumption
That is, of course, a very silly assumption to make. However, it would be interesting to see how HMRC dealt with someone pointing out that an identical (being a franchise) business was using a lower rate and had it "accepted" as correct.
Not sure I'd like to risk it myself, as it seems to be clearly wrong. It essentially relies on saying you blindly followed the other franchisee, which is not the most solid of arguments. Plus, the other franchisee will do their nut when their rate goes up because you pointed it out.
HMRC may challenge choice of FRS
While I generally agree with Les Howard's comment
'The key is that the choice is reasonable. If so, then HMRC cannot backdate any change to the category.
I note that there has been a recent tribunal decision released 'The Vintage Tea House Ltd v HMRC (2013) TC 03160'. The case concerned The Vintage Tea House (VT) which began selling gifts such as teapots, mugs & light refreshments etc. In May 2008 VT elected to join the FRS and chose the FRS rate of 7.5% 'retailing that is not listed elsewhere' rather than 'catering' which was 12.5%. VT was influenced in making the choice by the terms of its lease, which made the catering side of its business ancillary to retail sales. Planning permission dated May 2010 showed that there had been an application for change of use from retail to mixed use of retail & cafe. HMRC analysed the business records and were able to show that the teashop sales were greater than the retail side -over 66% of the turnover and in some periods up to 87%.
HMRC assessed the company arguing the 12.5% FRS should have been used.
The Tribunal only ruled that VT had made a reasonable choice for 6 months of its trading since it was able to show that the gift shop was its main trading activity but their appeal was unsuccessful for the remaining 3.5 years.
I guess the moral of the story is that the FRS percentage should be reviewed annually and a record kept of why a certain percentage has been applied.
Malcolm Mcfarlin
materials??
Just a thought looking at the link to FRS7300 from above.
If he supplies materials (turf, seed, plants, compost) that account for 10% of turnover he might be able to use "general building materials 10% or more of turnover" as that classifies "landscaping" as an example of a trade the qualifies for the rate
And this sector is 8.5%
Or am I trying to read it from a favourable angle ??