A Tribunal decision has provided further evidence of the difficulties that HMRC find in monitoring taxpayers’ use of the Flat Rate Scheme (FRS), and how they handle situations when there is an apparent error.
The taxpayer ran a design engineering business, involved in projects related to specialised vehicles and machinery. When joining the FRS, he rejected the category ‘architects, civil and structural engineers,’ since his work was not related to buildings. He opted instead for ‘any other activity not listed elsewhere.’ HMRC assessed him for nearly £9,000 plus a penalty for conduct that was deemed ‘deliberate.’ This penalty was reduced, on Review, to ‘careless.’
The Tribunal held that it was reasonable for the taxpayer to have chosen the FRS category that he did. The Tribunal had some difficulty defining the FRS categories, but ultimately did not need to do so. The key is that the taxpayer made a reasonable and informed decision.
Comment: when choosing a FRS category, suggest 2 or 3 possible categories. Make a written note why one is chosen rather than the others. And, review the category choice from time to time.
And, it is shocking that HMRC even considered a ‘deliberate’ penalty simply for incorrect choice of a FRS category!
The decision is at: http://www.bailii.org/uk/cases/UKFTT/TC/2014/TC03638.html
You might also be interested in
Replies (9)
Please login or register to join the discussion.
Not even incorrect
I find very few clients business activities fit nicely into the categories that HMRC recognises (not mentioning the farce of having categories for activities not elsewhere listed and business services not elsewhere listed at different rates).
By HMRC's logic here a tree surgeon would be exempt altogether under medical services.
Never could figure out what game HMRC was playing with the flat rate scheme but penalties of the magnitude are worrying.
Extended list
I have inherited a LOT of clients on the FRS, and I really worry about it as I have been convinced from day 1 that it is almost custom designed to trip one up.
The annoying thing to me about the FRS percentages listed in the public notice is rubbish and even more annoying is that there is a much extended list included in the HMRC manuals, freely available online. HMRC, if all manuals etc are electronic now, why oh why don't you include the extended lists, filtered by sector and trade?
http://www.hmrc.gov.uk/manuals/frsmanual/frs7300.htm
http://www.hmrc.gov.uk/manuals/frsmanual/FRS7200.htm
HMRC National Advice Line
Excellent article Les to draw practitioners advice to this issue.
The HMRC National Advice Line are usually non-committal when advice is sought, They simply say it is for the business to make a reasonable decision. Thankfully the tribunal saw sense but unfortunately an appellant's costs in a hearing are not recoverable from HMRC unless the case is deemed complex. An expensive business appealing a poor HMRC decision
Malcolm McFarlin
www.mandrtaxadvisers.com
It is an opportunity not a threat!
I totally agree that the classifications are more clueless than if i had made them up at 2am after about 5 whiskies. In my view that is an opportunity not a threat, and I have roughly 30 clients in the flat rate scheme.
Some are very clearly in a given category, for example architects. Not much to argue about there? Well it depends.
Some of my achitects have "Architects" on their invoices, and their letterheads. Nothing to look at there. Well what about an "architectural visualiser"?
This is not architecture in the normal meaning of the word, and instead of dealing mostly with property developers and the like, this guy deals with architects. He comes up with these fancy models so the ultimate customers of the architects can see what the end result will look like.
So that is "Any activity not elsewhere listed" then.
The majority of my FRS clients are in the nuclear sector in a variety of roles from project management (but not relating to property schemes), bid management, cost estimating and health physics.
So that is "Any activity not elsewhere listed" then.
For those who are worried about this, look up a case from about 6 months ago where an accountant local to me - Trevor Morris of Tax Assist Whitehaven - won a Tribunal regarding a nuclear sector client in the FRS under "Any activity not elsewhere listed".
If HMRC wants fewer businesses on FRS, someone who is not drunk needs to spend 4 hours sometime running through the classifications properly. How hard can it be?
Professional Services
Most listed professional and "labour only" categories are 14% or 14.5%.
As an Accountant I'm miffed that Management Consultants get 14%.
If any "labour only" (and a bit of stationery and petrol) people who choose 12% should be careful and sure.
You make my point!
Exactly. if I was drafting the categories, even after 5 or 6 pints of beer I would draft them in such a way that there was no wriggle room for these guys to avoid 14.0 or 14.5%.
Names
Mr Mischiefs comments made me think of dear old Roger Lloyd Pack, who famously played Trigger the road sweeper in Only Fools. He was of course described as an "Environmental Hygienist"!
I think the point has been made that what you call yourself is less important than what you actually do, so I would say that the "other" might be a little like client Russian Roulette.
Oh [***], just made me think of The Deer Hunter!!
A guy in the pub
told a client that if his rate was 12%, then add up all the VAT (ie. at the 20% Std Rate) then hand 12% over to HMRC and keep the 8%. (ie. for a £100 net invoice keep £8 and pass on £12)
Come to think of it, it could have been Trigger.
When I questioned it I lost the client.
Reliable
Without even thinking about whether this is correct (it isn't as you know) I am constantly amazed at the amazing effects on credibility a few pints of Adnams can have. This 'bloke down the pub' should be in charge of all our finances, he is such an expert.
There are a few tax experts who do like a few shandies, but we can probably assume most of these blokes are just half cut know-it-alls who probably spout on in expert fashion about everything else as well.
Well done for sticking to your guns. Wonder if his mate at the pub will be his defence lawyer proper rather than the bar room barrister he is?!