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Flat Rate Scheme and Cross-Border supplies

14th Nov 2014
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During 2014, perhaps the question I have been asked most often is how a taxable person using the FRS (Flat Rate Scheme) has to treat cross-border supplies.

Where a small business has substantial cross-border transactions, this issue will have a significant impact on his profitability.

Selling Goods

Goods sold either in the EU or to a customer outside the EU are still within the scope of VAT. They are either standard rated, reduced rated, or zero rated. This means that they will fall within the turnover for FRS purposes. Where such supplies are eligible for zero rating, the taxpayer should consider leaving the FRS, as he is likely to be paying more VAT than he would otherwise.

Selling Services

The key issue here is to determine the Place of Supply of the services.

B2B General Rule services are deemed to be supplied outside the UK, and are therefore outside the scope of UK VAT. They are therefore excluded from the turnover for FRS purposes.

Other B2B services which are deemed to be supplied within the UK will fall within the turnover for FRS purposes.

B2C services deemed to be supplied within the UK are included in the turnover for FRS purposes.

B2C digital services supplied by a taxpayer registered for MOSS are deemed to be supplied in the Member State of the recipient, and are therefore excluded from the turnover for FRS purposes.

Receiving Goods or Services

Where the taxpayer receives goods from outside the UK, but within the EU, Acquisition Tax has to be accounted for. But, unless the acquisition is a capital item with VAT exceeding £2,000, the input tax cannot be claimed.

Where the taxpayer imports goods, he will receive a C79, which shows his input tax. However, unless the importation is a capital item with VAT exceeding £2,000, this cannot be recovered.

A taxpayer who regularly buys from outside the UK might consider leaving the FRS.

Similarly, where the taxpayer receives services from outside the UK, or from outside the EU, and where he is required to use the Reverse Charge procedure, the entries are treated outside the FRS.

Where the Reverse Charge does not apply, then there is no VAT charge, and FRS is not affected.

The main guidance from HMRC is in Notice 733, paras 6.3 and 6.4. The problem is that it does not explain why certain transactions are included in, or excluded from, the FRS.

Bad Debts

While on the subject of the FRS, do note the special rules relating to bad debts, and how they are to be accounted for under the FRS. In relation to cross-border supplies, this will only apply when output tax was accounted for on the original supply. See the HMRC guidance in Notice 733, paras 14.1  & 14.2.

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Teignmouth
By Paul Scholes
14th Nov 2014 20:55

Bad debts

Just out of interest I am waiting for a final written response from HMRC on bad debts and FRS when the sale is zero rated, eg as in cross border sales of goods.

As you say, if you follow the guidance (and legislation), you will only get formal bad debt relief if there was VAT charged to the customer and so it follows that in a zero rated supply an FRS registered supplier will not get the relief and, furthermore, it seems to follow that the FRS VAT paid over on the original sale, is lost.

So, how about when the supplier accounts for FRS VAT on a cash basis?  In theory, as soon as the debt is written off, the supplier should send the FRS VAT off to HMRC.

This seems inequitable, but perhaps follows the principle mentioned above over the inability to recover the notional VAT on EU goods purchased.  I therefore wrote to HMRC asking for clarification over the ability, or not, to recover the FRS VAT on a bad zero rated debt.

I have had two responses so far, one saying no and the next yes but seeing as the second included a statement that £0 - £120 = £80, I thought it worth another try.

To save me yet another two months of correspondence, if anyone has already obtained confirmation of this, I'd be grateful.

 

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