HMRC has written to all traders who are registered to use the flat rate scheme, warning them about the 16.5% flat rate, but the wording may confuse both taxpayers and advisers.
No way out
As Neil Warren explained the apparent loophole in the proposed new rules for the VAT flat rate scheme (FRS), has been closed. To determine whether the trader is a limited cost business the trader must review what he spends on “relevant goods”. However, the exclusions from relevant goods have been expanded to make it difficult for FRS traders to manipulate their goods buying strategy to avoid becoming a limited cost business, which must use the new 16.5% flat rate.
VAT regulations passed on 8 March 2017 exclude from relevant goods any goods which are not used exclusively for the business, and all of the following:
- vehicles, vehicle parts and fuel except where the trader is in the transport sector and owns or leases a vehicle for his business
- food or drink for consumption by the trader or his employees
- capital expenditure (of any value)
- goods acquired for the purpose of resale, leasing, letting or hiring out except where the main business activity trader ordinarily consists of selling, leasing, letting or hiring out such goods
- goods for disposal as promotional items, gifts or donations
The letter to FRS traders from HMRC says: “You are a limited cost business if the cost of your goods is below 2% of your turnover, or below £1,000 per year.”
Taxpayers may read “your goods” as meaning the cost of the goods which they sell or create, and interpret “cost” as being the price at which the business sells the item for. The correct interpretation of “cost of your goods” is the gross amount paid for the goods purchased by the business, and this is clear if the taxpayer continues to read to page two of HMRC’s letter.
If your clients don’t get that far, you may have to explain what HMRC is getting at.
The HMRC letter advises the taxpayer to read VAT Notice 733 for more detailed guidance. This notice has been updated for the new FRS rules, but it doesn’t include the last bullet point concerning promotional items, which is in the regulations.
HMRC doesn’t advise the trader to discuss his future VAT status with his tax adviser or accountant, but that would be the best course of action for most FRS traders.
Leaving the FRS
A trader whose main business is the provision of services is unlikely to meet the 2% goods threshold, so will want to stop using the FRS before 1 April 2017. There is no online form for the trader to complete to tell HMRC he is leaving the FRS. This notification must be done in writing (see para 12.1 of VAT notice 733), but that letter can be sent after the fact. The trader doesn’t have to inform HMRC in advance if he is reverting to normal VAT accounting.
Where the trader’s turnover for the next 12 months is expected to be no more than £83,000, he may well wish to cancel his VAT registration with effect from 31 March to completely avoid VAT administration. This will give a limited company the added advantage of delaying MTD quarterly reporting until the start of its accounting period which starts on or after 1 April 2020.
You can cancel a VAT registration on behalf of your client, and the easiest way to do this is online. The cancelation can’t be backdated for a business that continues to trade, so you need to make sure this is done before midnight on 31 March 2017. If the trader is in the FRS, he is deemed to leave that scheme the day before VAT registration is cancelled (VAT Notice 733, para 12.4), so on 30 March, for a 31 March deregistration.
The trader should be advised to issue any outstanding invoices by close of business on 30 March. Once the trader is deregistered from 1 April onwards, he won’t be able to reclaim VAT on any purchases and must not charge VAT on his sales. However, purchases on 31 March will fall inside normal VAT accounting, and outside the FRS, so VAT can be reclaimed on those items. A good day to buy a new computer to prepare for MTD perhaps?