Save content
Have you found this content useful? Use the button above to save it to your profile.
AIA

Flat rate scheme - the final part of the story by Neil Warren

by
30th Mar 2009
Save content
Have you found this content useful? Use the button above to save it to your profile.


Neil Warren is back again with more background on the flat rate scheme. Members have asked about overseas supplies and the flat rate scheme, so Neil has set out the details for us.

The third and final instalment of my flat rate scheme (FRS) review for AccountingWeb considers two very important issues for all practitioners:

  • How do you deal with transactions involving international trade – both goods and services?
  • Can you backdate a client’s application to join the FRS, which would be a great outcome if it gives him a big tax rebate
  •  

  •  

Acquisition of goods from another EU country

Over the last few weeks, I have considered a number of technical issues that have probably left you thinking that the FRS is anything but simple! So here goes with another twist to the tale:

Example 1
John is VAT registered in the UK and buys teapots from France (EU country) and sells them in the UK. He uses the FRS. He purchased £10,000 of teapots for the
VAT quarter ended 28 February 2009. His French supplier correctly did not charge him VAT because the sale is to a VAT registered business in another EU country. What are the issues with the flat rate scheme?

Solution
If John was adopting normal VAT accounting, he would account for acquisition tax in Box 2 of his February VAT return i.e.£10,000 x 15% = £1,500. This calculation is based on the price paid for the goods multiplied by the rate of VAT that applies to teapots when they are sold in the UK. He would then reclaim the same amount of VAT as input tax in Box 4 because the goods in question relate to his taxable activities. This produces a ‘nil’ effect on his overall VAT payment in Box 5.

However, the key point with the FRS is that no input tax is reclaimed unless it relates to capital expenditure costing more than £2,000 including VAT. So the Box 2 entry is still relevant for John – but he can’t claim any input tax in Box 4.

Sale of goods to a business in another EU country

I will now highlight what I consider to be one of the unfair outcomes of the FRS, which I have discussed with HMRC’s policy team. Let’s reverse Example 1 and pretend that John is now selling his teapots to a customer who is VAT registered in France. He will not charge VAT on the sale (zero-rated) – but he must still account for FRS tax on the money received. This is because FRS tax is payable on any zero-rated and exempt business income, a big disadvantage of the scheme for some taxpayers.

The reason I feel this measure is unfair is because the French customer will also account for acquisition tax in France - isn’t this a case of double taxation? HMRC say ‘no’ because the various flat rate percentages take account of the fact that some UK traders sell zero-rated goods abroad – so they are reduced accordingly.

Services – not a problem

Now for some good news. There are many occasions when a UK business supplies services to an overseas customer (EU and non-EU) and does not charge VAT. This is because the ‘place of supply’ is outside the UK.

The difference between selling teapots to a French business and completing a set of annual accounts for the same customer is that the sale of the goods is zero-rated as far as VAT is concerned but accountancy services are outside the scope of VAT under the place of supply rules. And the FRS calculation is not applied to any income that is outside the scope of VAT.

As a final point, if your client provides services to an overseas customer where VAT is charged, then the FRS percentage is applied to the VAT inclusive income in exactly the same way as for sales to UK customers.

Backdated application to join FRS – is this allowed?

Imagine the following situation: you’ve just advised a client to join the FRS because it will save him £3,000 per year compared to normal VAT accounting. He is delighted with your proposals but fancies eating a bit more of the cake. He asks if his FRS application can be backdated one, three or even seven years so he can save even more tax (it would be very difficult to go back more than seven years because the FRS was only introduced in 2002!)

  • The legislation in SI1995/2518, Reg. 55B(1)(b) confirms that HMRC are entitled to allow traders to join the scheme on any date (past, present or future).
  • However, it is their policy to only allow a backdated application in ‘exceptional circumstances’. Needless to say, they have never encountered what they consider to be an exceptional circumstance. A lower tax bill for a client is not an exceptional circumstance!
  •  

  •  

There was a glimmer of hope in a recent tribunal case involving the journalist David Burke (VTD 20,881). Mr Burke discovered that if he had joined the FRS in 2002 rather than 2008, he would have saved an extra £20,000 in VAT. He asked HMRC if they would let him join the scheme with effect from 2002 and recalculate his VAT payments…….they refused! So Mr Byrne put forward the ‘exceptional circumstance’ that he had received a VAT visit in 2004 but the officer had not told him about the benefits and potential savings of the scheme.

Somewhat amazingly, the tribunal supported the taxpayer and allowed the appeal – but I understand that HMRC have appealed the decision. To be honest, I think the decision will be reversed because Mr Burke acknowledged that he had received various leaflets from HMRC about the scheme – but he had not read them! So it is a bit harsh to expect the VAT man to work out his FRS savings instead. We’ll wait and see on this one!

So the reality is that a taxpayer can only join the FRS from a current or future date, which is probably not a bad thing to ensure a level playing field for everyone.

Tags:

Replies (0)

Please login or register to join the discussion.

There are currently no replies, be the first to post a reply.