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For the love of flat VAT

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2nd Nov 2015
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Neil Warren just loves the VAT flat rate scheme – or, FRS as it’s known to its friends. He can talk about it all day long, unless Manchester United FC is playing, which trumps even the FRS.

Most tax advisers are aware that the VAT flat rate scheme captures zero-rated and exempt income, as well as all standard rated income. This is not good news for a builder who works on new residential properties (zero rated) or an estate agent arranging mortgages (exempt).

But many tax advisers are not aware that the scheme ignores income that is outside the scope of UK VAT. As a further twist, the “outside the scope” income is also excluded from Box 6 of VAT returns submitted by scheme users (outputs).

Here are some examples of FRS exclusions:

Place of supply is outside UK

John is an accountant who is VAT registered in the UK and uses the FRS. He completes management accounts for a business based in Paris. John’s fees are outside the scope of VAT under the general B2B (business to business) rule.

The place of supply is France and the French customer will deal with the VAT by doing a reverse charge calculation on his French VAT return. John must exclude the fees from the FRS but must complete an EC Sales List each calendar quarter.

Note – most B2B sales to overseas business customers will be excluded from the FRS on this basis unless the service is an exception to the general B2B rule.

MOSS sales (Mini-One Stop Shop)

John the accountant registered for VAT MOSS on 1 January 2015 because he sells software online to private individuals in France (ie B2C rather than B2B). He charges French VAT on these sales and pays the tax on his quarterly MOSS return submitted to HMRC. The income is outside the scope of UK VAT (place of supply is France) so is again excluded from John’s UK VAT returns and the FRS calculations.

Compensation payments

A taxi business had a new garage door fitted to the building where all of the cars are kept, and the door had a faulty connection.

It collapsed on the head of one of the drivers, who needed hospital treatment. The garage door company repaired the door and also made a payment of £1,000 to the taxi business for the suffering caused to the driver.

The payment of £1,000 is not relevant to any goods or services provided by the taxi firm to the garage door company. It is outside the scope of VAT as a compensation payment and not included in the FRS calculation.

Cancellation charges

If a business makes a charge to a customer for cancelling an order, then the cancellation charge is outside the scope of VAT.

When a hotel keeps the deposit paid up front by guests who have either cancelled their booking or don’t arrive, that receipt is excluded from the FRS. However, the hotel must be careful with the rules of unjust enrichment.

Where the deposit charged was £50 plus VAT, then the “plus VAT” must be refunded to the customer rather than retained by the business.

Other less obvious exclusions are:

Bank interest received

HMRC accept that bank interest received should be excluded from the FRS calculations, on the basis that the income is non-business. This point was established by Mike Thexton who took his own case to the first tier tax tribunal: Fanfield Ltd and Thexton Training Ltd

The same principle extends to dividend income.

Donations

The challenge is to ensure that a donation given to a business or charity by a third party is genuine, ie the donor doesn’t receive any benefits that might be taxable. HMRC accept that an acknowledgement of the donation in a programme or local press is not an advertising benefit that could be standard rated. 

The following are also excluded from the FRS:

  • Payments made to a business in relation to insurance claims
  • Tax refunds or repayments on VAT returns
  • Grant income where no goods or services are supplied by the recipient, eg a lump sum of money paid by a local authority to a charity to help pay its bills.
  • Fines and penalties – e.g. income received by a hotel if it fines guests for smoking in a non-smoking room. 

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By Jason71
24th Nov 2015 16:15

Insurance repayment for van - Flat rate scheme

Hi All

I have a client who is on the Flat Rate Scheme who has just received money from the insurance company because the van he owned was written off.

As stated above this is excluded from FRS.

When the van was originally purchased the input VAT was claimed.

Should I treat the receipt as having a VAT element that needs to be disclosed?

Any help appreciated

 

 

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