Engineer wins VAT flat-rate appeal

Mehmet Can/iStock/Thinkstock

An engineering business has won an appeal against HMRC after it disputed the legality of official guidance on the VAT flat-rate scheme (FRS) for small businesses.

When mechanical engineer Neil Harris registered his Cumbrian-based company for the FRS in 2009 none of the categories on the list supplied by HMRC appeared relevant to his business. After advice from his accountant he registered under "Any other activity not listed elsewhere", with a flat rate of 12%.

Following a VAT inspection three years later, HMRC ordered that Harris should have registered in the category ‘Architect, civil and structural engineer or surveyor’. HMRC’s cited its own flat-rate scheme guidance leaflet, which placed "engineering consultants and designers" in the 14.5% VAT category.

It demanded arrears of £8,891 plus a 35% penalty, later reduced to 15% after a review.

Harris and his accountant, Trevor Morris of TaxAssist Whitehaven, challenged the decision on the grounds that a mechanical engineer is not a civil or structural engineer.

To support their case against HMRC they got advice from Glyn Edwards, a VAT consultant at Wolters Kluwer CCH, which provides information and services to accountants.

The first-tier tribunal ruled in Harris’s favour. He walked away with nothing to pay and, as he had fee protection insurance with CCH, his accountant’s fees and the cost of Glyn Edwards’ time were also covered, CCH said.

“The key to the whole issue was that the guidance notes had no backing in law,” Harris said. “I wouldn’t have known that, but Glyn did. I would have lost the case on my own.”

Glyn Edwards commented: “Although there was a relatively small amount of tax at stake, this could have caused the collapse of Mr Harris’s business. This has been a successful outcome and establishes an important principle. But I do wonder how many other engineers have been misled by the VAT guidance notes from HMRC into using a category that is only intended for structural and civil engineers.”

The tribunal's decision (TC/2013/03647) hasn't been published yet, although AccountingWEB has seen a copy.

Comments
essex accountant's picture

most interesting

essex accountant | | Permalink

I have 40 - 50 clients registered at 14.5% when they should have been at 12%!! i will consider re-registration for them all. I am also a CCH user and will check with them first

daveforbes's picture

mechanical vs. civil engineering    2 thanks

daveforbes | | Permalink

Similar experience

RogerCB | | Permalink

We had the same situation with a client and after discussing it with Taxsafe, put forward the same argument.  HMRC would not comment on our argument or confirm the trade sector the client had to use (despite a written request from us), but said they would not disagree with a sector chosen by the company as long as this was a reasonable choice.  The client thinks his original choice is reasonable and so has not changed.

Typical HMRC

AndrewV12 | | Permalink

Why did not HMRC just disagree with the decision and advise the engineer to use a different rate going forward.  Typical of HMRC in creating an  insufficient guidance lists, and just adding on  kop out 'Any other activity not listed elsewhere'.   Why not create a water tight list in the first place. 

 

Looks like the engineer was lucky and got off by a technical point.  But well done Mr Edwards for being aware of it.

Re-registering?

Carl London | | Permalink

essex accountant wrote:

I have 40 - 50 clients registered at 14.5% when they should have been at 12%!! i will consider re-registration for them all.

 

Also considering this for someone. But will this mean not being able to rejoin the FRS for 12 months?

Choosing a flat rate %

Allandfrost | | Permalink

This decision is understandable when the rate was selected by our view of the "best fit" of the business to the published rates.   On-line registration now does not give the flexibility in that HMRC give a rate.  Does anyone think that the rate suggested would be open to being challenged?

Guidance notes are ........

7555775 | | Permalink

Guidance Notes!

What I find interesting is

nickselectaccounting | | Permalink

What I find interesting is that when you apply for the Flat Rate Scheme online, using the Agent Dashboard, HMRC use the SIC code as a basis of Flat Rate selection.

Which was not the one that I had selected for a number of reasons. I had considered reporting this however had planned to stick with the higher flat rate than automatically applied for.

This could be a point for concern or even a basis of argument when considering a challenge? Compare the SIC code to the Flat Rate as per HMRC?

nigel's picture

Why won't HMRC advise?    1 thanks

nigel | | Permalink

In the early days of Flat Rate VAT I would routinely phone HMRC's central VAT number to try to get guidance on selecting the correct flat rate percentage. Every time they basically said it's up to the taxpayer to choose and HMRC reserve the right to disagree and penalise them afterwards.

May I state the obvious: what a totally stupid system!

The flat rate trade list is far too brief, even if you refer to the expanded notes in the HMRC Manual.

It needs to be far more detailed to avoid this type of dispute, Surely, with the experience of years since flat rate was introduced they could come up with a better list?

 

Potential Challenge Against Any Penalties?

brian.barrett | | Permalink

Firstly I think we should be careful using the 'P' word as the World Cup rapidly approaches!

More seriously, it is an obvious decision of anyone when joining the scheme as to how the typical amount of VAT due on the flat rate percentage compares to doing a full calculation.  If the rate means your VAT liability is much higher than doing a full calculation, you may not wish to take the option.  (Of course the relative simplicity of the scheme may encourage you to put up with a slightly higher VAT liability.)

If the incorrect rate has been applied, therefore, I find it reprehensible that the penalty is based on the difference between the rate used and the rate you 'should have used' because had it been established you should use the other [lower] rate you may not have chosen the flat rate scheme!

As such perhaps any penalty could be argued should be based on the difference between your typical full calc VAT bill and the [incorrect] rate you used.  HMRC will argue that the rate you should have used gives the VAT liability 'typical' of your business, but you may be able to argue that it does not.

Given the result of this appeal, perhaps all of the above may be academic, but it may be that penalties could be imposed in more 'blatent' cases.

mr. mischief's picture

Bonkers!    1 thanks

mr. mischief | | Permalink

It's bonkers on two fronts:

1.  The list of trades seems to have been drawn up by a monkey given 5 minutes and the back of a fag packet.  I have  a number of clients who are Project Managers and Programme Managers, not exactly unusual job titles.  12% and trebles all round, folks!

2.  I have about 20 clients in FRS and the average annual profit per client is £4k per year.  So that is one accountant where the client base is making an £80k profit on VAT just because some numptie years ago got delegated the job of setting up the categories.  New clients can barely believe their luck when I tell them about this!  In a time of austerity with daft bedroom taxes and pastie taxes and the like I can't understand why this little wheeze has been left alone.

 

I have around 100 project

trotters | | Permalink

I have around 100 project managers/programme managers and I believe the best fit for the flat rate scheme is "Management consultancy", this is usually 14% unless they are IT managers at 14.5%.

Have you had a problem with HMRC at all?

 

mr. mischief's picture

Acid test

mr. mischief | | Permalink

For me, management consultants are people like KPMG, Bain and Co and the rest who operate specifically under the terms of a management consultancy contract.  I am putting this to the test in a small sort of way.  A new client was given no guidance by her previous accountant on just about anything including VAT, chose 14.5%.

She is a project manager.  She does not operate under the terms of a consultancy agreement or contract.  I have written to HMRC - as part of a response to a letter from them asking about some of her VAT returns where she got things all wrong - stating my opinion that she fits the 12% category on the basis that she is not a management consultant, surveyor or any of the other specific activities listed at 14.5%

I'll update this thread in 10 weeks time when HMRC reply.

essex accountant's picture

CCH advice

essex accountant | | Permalink

i have spoken to them today. They say a move to 12% cannot be backdated as this was the rate chosen by the trader, even though the choice was made in the light of HMRC guidance civen on their website, which was incorrect.

However, i was advised that 12% is the rate that can now be used and that the trader can just decide to use this rate from now on in the light of the recent appeal decision. CCH say there is no need to inform HMRC, but to use the lower rate from now on. 

However the HMRC website says:

If you change flat rate percentages you must write and tell us within 30 days of the change taking place. You should write to:

National Registration Service
HM Revenue & Customs
Imperial House
77 Victoria Street
Grimsby
Lincolnshire
DN31 1DB 

i think HMRC needs to be informed of the new rate. What do others think? I will call CCH this afternoon and ask them about this.