VAT Flat rate scheme - yes another one!

VAT Flat rate scheme - yes another one!

Didn't find your answer?

A bit of an odd one.

I registered a client for VAT and FRS with an activity that attracted a rate of 12%.

Unknown to me, the client made a unilateral decision that his activity had a rate of 14.5% and prepared his VAT Returns accordingly.

This has come to light in preparing his year-end accounts. The client maintains that 14.5% is correct. For my part, 12% seemed appropriate based on the information I was given.

What do we need to do? There is no loss to the public purse but, although I do not expect HMRC to even notice the discrepancy, I am uncomfortable with returns being filed at a different rate to that registered.

Thanks in advance.

Replies (19)

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Stepurhan
By stepurhan
26th Apr 2014 11:42

What penalty would arise?

Using a rate other than the declared one is wrong. However, aren't VAT penalties based on the tax lost? No tax lost, as they have used a higher rate, so no penalty. Maybe HMRC will give your client a reverse penalty for the tax overpaid if they find out. :-)

I would be more worried about continuing to work with a client that changed the rate without telling me, and then argued that they were correct. That's just a fundamental lack of respect. They are paying you for your expertise but clearly have no faith on it. I'd say you have a candidate for sacking there.

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Replying to kamran37:
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By andy.partridge
26th Apr 2014 12:29

Hello stepurhan

stepurhan wrote:

Using a rate other than the declared one is wrong. However, aren't VAT penalties based on the tax lost? No tax lost, as they have used a higher rate, so no penalty. Maybe HMRC will give your client a reverse penalty for the tax overpaid if they find out. :-)

I would be more worried about continuing to work with a client that changed the rate without telling me, and then argued that they were correct. That's just a fundamental lack of respect. They are paying you for your expertise but clearly have no faith on it. I'd say you have a candidate for sacking there.


Thanks for your post. There isn't a respect issue at stake. I suspect it was more of an oversight on the client's part. He set himself up on FreeAgent and away he went with it, oblivious to the registration. Now of course he is thinking, 'should I recover the cumulative difference between the 14.5% and 12% on my next VAT Return and carry on using 12%?' If I got the rate wrong in the first place there is more of a case for client sacking me than me sacking him. Aside from this bit of awkwardness, I enjoy working with him.
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RLI
By lionofludesch
26th Apr 2014 11:50

Interesting

What are the categories in dispute here ?

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Replying to coolmanwithbeard:
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By andy.partridge
26th Apr 2014 12:35

Vague

lionofludesch wrote:

What are the categories in dispute here ?


I used 'Other business services . . .' and he used 'IT consultancy'. My belief was that the predominant service would be training.
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RLI
By lionofludesch
27th Apr 2014 11:00

I agree

Fits the bill better.

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By andy.partridge
28th Apr 2014 12:30

Thank you Basil

I acknowledge that the client knows more about their business than I do and if they believe they have used the correct rate, that is fine with me.

It begs the question, if there is some doubt in the client's mind, should the client have continued to use the lower rate and reviewed the position after 12 months? The fact that the client has never used the rate they were registered with looks instinctively wrong.

I am anticipating a question from the client along the lines of, 'As you registered me for FRS honestly, should I amend my next VAT Return to reflect that I used what you considered to be the wrong rate?' That is one I do not have an answer to.

As the difference amounts to around £2,000 it is a question I would probably ask my accountant! 

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Stepurhan
By stepurhan
28th Apr 2014 12:31

Possible sequence of events

Client signs FRS registration prepared by you. Signs without reading fully, as many clients do.

Client prepares first return. Forgets intended rate and looks it up on HMRC website.

So they did not ask you about the £2,000 difference because they didn't know there was a £2,000 difference. They have just looked up the rates, picked the one they think is correct and assumed that was what went on the form. It just never occurred to them that another rate could have been used, so they never thought to check what had been used.

My "respect" concern more arose from the client's insistence contrary to your advice once the difference had been spotted. If you agree that, with further information from them, the amended rate is correct then it is just a communication issue.

 

 

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Stewie
By Stewie Griffin
28th Apr 2014 17:01

Normally lower rate

Blimey!

We normally get the clients looking to obtain a lower rate than we advise!!

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By andy.partridge
28th Apr 2014 17:33

@ Stewie

I know it sounds incredible, but the client genuinely overlooked the fact that an alternative activity had been registered by us. It won't be long, I think, before the client realises quite how much they are 'out of pocket'. Correction, they are not out of pocket at all, but they might see an opportunity to recover £2k paid 'unnecessarily'. That is now the crux of the issue, aside from the prospect of having HMRC breathing down our necks.

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By andy.partridge
28th Apr 2014 22:19

@ Basil

Thank you for your post.

There is much to digest there and I will respond when I get the chance. Extraordinarily, I'm not sure I entirely agree with you, but before too much egg appears on my face I will check my facts first.

Edit. Scrap that. I agree with you Basil. Thank you.

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By Malcolm McFarlin
01st May 2014 10:48

swings and roundabouts

Would it not be the case that if you tried to reclaim the £2,000.00 VAT, then this would mean that the net profit of the business will have increased and there will be a liability to pay additional self/assessment or corporation tax? 

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Replying to Francois Badenhorst:
RLI
By lionofludesch
01st May 2014 11:04

It would

Malcolm McFarlin wrote:

Would it not be the case that if you tried to reclaim the £2,000.00 VAT, then this would mean that the net profit of the business will have increased and there will be a liability to pay additional self/assessment or corporation tax? 

It would - but not the whole £2000. 

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By andy.partridge
01st May 2014 11:14

Indeed

Profit increases by £2,000 which would be subject to CT.

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By shoshana
02nd May 2014 10:10

Can't change retrospectively

If the client chose 14.5% reasonably then HMRC will not accept a retrospective refund claim. All you can do is convince the client to change to 12% going forwards, assuming this is a better reflection of what (s)he does.

As somebody who runs a training and consultancy business which used to use FRS, I had no problem in choosing the 'none of the above' as at the time our turnover from training exceeded our turnover from consultancy which is the key test.

This is likely to result in an enquiry (probably by telephone) as the VAT returns will show a different ratio of VAT liability to turnover compared the that expected by HMRC.

Has the client filed correct returns i.e. showing the turnover gross of VAT, and not showing input VAT and purchases figures (subject to claiming pre-registration input VAT and capital goods on the same invoice with a VAT-inclusive value of over £2,000)?

Malcolm

Malcolm Greenbaum

Director, Greenbaum Training and Consultancy Limited.

IFRS, UK GAAP, US GAAP, UK tax and VAT

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Replying to legerman:
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By andy.partridge
02nd May 2014 10:42

Muddier waters

shoshana wrote:

If the client chose 14.5% reasonably then HMRC will not accept a retrospective refund claim. All you can do is convince the client to change to 12% going forwards, assuming this is a better reflection of what (s)he does.

As somebody who runs a training and consultancy business which used to use FRS, I had no problem in choosing the 'none of the above' as at the time our turnover from training exceeded our turnover from consultancy which is the key test.

 

Malcolm, from what you are saying the initial registration at 12% was correct, but it seems that the client's usage of 14.5% somehow trumps that.  

The client has used the rate that reflects the mix of services they have provided, but not the mix of services they intended to provide at the date that registration took place. Does this change you view?

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Replying to nodrogbir:
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By shoshana
02nd May 2014 16:34

Initial registration won't necessarily set a rate

With FRS, the taxpayer decides the most appropriate category and applies it. It is then up to HMRC to challenge it if they believe it to be incorrect.

I did not get the impression from the OP that business had been registered for FRS with a 12% flat rate, just that there was  a disagreement over the rate. If it was registered as a 12% business and the client has been applying 14.5% then I would have thought HMRC would have enquired into the VAT returns as I would think a flag would be set against the return for using an unexpected rate.

Might be worth a phone call to HMRC to explain that the client has been using the wrong rate, but only if it was registered as a 12% business.

As for the appropriate rate, this should be initially based on expectation, but if it turns out that a different service predominates (i.e. accounts for more than 50% of the total supplies) the rate should be adjusted as appropriate. It is very rare for HMRC to backdate any increase required unless the taxpayer was unreasonable in making their initial selection.

 

 

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Replying to Accountant A:
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By andy.partridge
02nd May 2014 17:32

2nd line

shoshana wrote:

I did not get the impression from the OP that business had been registered for FRS with a 12% flat rate, just that there was  a disagreement over the rate. If it was registered as a 12% business and the client has been applying 14.5% then I would have thought HMRC would have enquired into the VAT returns as I would think a flag would be set against the return for using an unexpected rate.

It is very rare for HMRC to backdate any increase required unless the taxpayer was unreasonable in making their initial selection.

 

 

It's in the 2nd line of the OP. HMRC have made no such enquiry. Do they ever? Not so far in my experience. In this instance HMRC do not need to backdate any increase.

The question is can the client recover the 'potentially overpaid VAT' on the strength that they have operated a higher rate which reflected their actual activity, but was not registered, and not the lower rate that was registered which reflected our understanding of their expected activity?

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Replying to Accountant A:
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By shoshana
02nd May 2014 18:56

There is an annual review

HMRC's own guidance says keep applying the initial percentage until the anniversary of the scheme.

Para 4.7 of Notice 733 in full:

4.7 What if the balance between parts of my business changes?

If the balance changes but you continue to do all the same activities, carry on using the percentage that was appropriate at the start of the year until the anniversary of you joining the scheme. Review the balance between the parts of the business each year. Make this review for the first day of the VAT period in which the anniversary of you joining the scheme falls. If on that date the balance has changed, or you expect it to change over the year ahead, switch to the trade sector for the larger portion of your expected business.

This may also mean that your flat rate changes. If this occurs use the new flat rate from the start of the VAT period in which your anniversary falls, not just from the anniversary to the end of the period

 

So if you applied on the basis the business would be mainly training and submitted an FRS application showing 12% (minus the 1% discount for the first year) then VAT should have been calculated using 12%.

You would need to make a voluntary disclosure of the error and seek a repayment of the overpaid amount.

If at the anniversary of joining the scheme, the consultancy is the major part of the business, then it would be proper to increase the rate to 14% from that point.

 

Hope this helps.

Malcolm

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RLI
By lionofludesch
02nd May 2014 11:14

Retrospectively ?

12% was chosen - does that mean that 14½% can't be used ?

I'm just wondering how HMRC would have viewed that if 14½% was originally chosen but the client used 12%.  These reverse situations often give rise to different HMRC views.

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