VAT advisers at fee insurer Abbeytax have warned that companies within the Flat Rate Scheme are being picked up by HMRC over transitional rate errors.
The firm reported an increase in calls to its helpline from companies on the Flat Rate Scheme and suggested they were being targeted for compliance visits because they offered easy pickings as part of HMRC’s “dash for cash”.
VAT rate change basics1. Normal tax point rules apply: date of invoice or date of payment, whichever comes first. For invoices or payments made before 4 January, VAT rate should be 17.5%; anything after will be 20%.
2. Retailers should start accounting for VAT at 20% from 4 January. If customer has an account and takes goods away prior to change, VAT is 17.5%. All other invoices after 4 January should charge VAT at 20%, unless goods/services were supplied before the rate change. Services that span the change can be charged VAT 17.5% before the change and 20% afterwards OR all charged at 20%. Where invoices is raised before, but delivery takes place after 4 Jan, 20% can be charged. These rules are optional and you do not need to notify HMRC.
3. Businesses issuing estimates for work after 4 Jan should quote 20%. Customers willing to pay before then can be charged 17.5%, subject to the anti-forestalling legislation.
4. Business should apply the same rate as originally declared for refunds or credit notes.
5. Invoices issued for year in advance, with monthly payments plus VAT must show VAT at 17.5% for all monthly payments up to 31 Dec 2009. All subsequent payments must be at 20%
6. Sales of tickets to events (theatre, cinema, football season tickets) before 4 Jan will attract 17.5% VAT, even if the event takes place after the rate change. The tax point is the receipt of payment.
Source: Abbeytax
“The calls generally concern consultancy type businesses. From a VAT perspective, someone billing one invoice a month with precious little overhead is a classic category for the Flat Rate scheme,” said Abbeytax VAT consultant Mark Burke.
“The switch back to 17.5% in January – when some FRS industry tarrifs didn’t return to their original rates - may have caught people on the hope. [HMRC] may see next January’s change as a possible area to target. Blitzing flat rate scheme users is a quick way to identify small errors to get a very high success rate.”
The rates for accountancy/bookkeeping, lawyers, architecture/engineering and labour-only construction services, for example, are all going up to 14.5% on 4 January.
The FRS scheme was introduced to simply VAT returns for small businesses, but the specific industry rates that are applied are just one of the obscure pitfalls that can trip up the unwary. The fact that they have to account for the flat rate on income not subject to VAT is another, he added.
While last January’s switch means most accountants and their clients have recent experience of changing VAT rates, Burke warned advisers against complacency on this issue.
“My concern would be that HMRC’s mentality is to see that the April 2009 penalty regime is actively and robustly pursued. If an error arises because of lack of reasonable care, it automatically incurs a penalty. Businesses need to be aware of the new regime because it means straightforward errors can be penalised. The magnitude o the error is no longer an issue, it’s whether they take reasonable care.”
To complicate matters for advisers, many will be swamped with individual Self Assessment tax returns when their business clients put the VAT rate increase into effect. While every business will face a different set of challenges with VAT, it was important for businesses to consider the effects of the VAT rate increase and how it will affect their specific circumstances, Burke advised.
“Shopkeepers need to be sufficiently keyed up to ensure their electronic tills are set up correctly and other businesses using standard accounting programs need to ensure they are able to reset the VAT codes to accommodate the changes. More to the point, have they tested them?” he said.
To help practitioners prepare themselves and their clients for the VAT rate switch, Abbeytax has prepared a VAT rate increase guide that includes a schedule of the new Flat Rate Scheme rates that will apply from 4 January 2011, the key issues to be considered at the time of the increase, as well a brief summary of the anti-forestalling legislation.
Picking up on a point raised by an AccountingWEB member in an Any Answers query, Burke said that accountants who spread their fees over several months should not have to worry about the anti-forestalling rules surrounding the VAT rate change.
“Anti-forestalling measures are going to affect relatively few people on only kick in if the client is not in a position to fully recover VAT,” he said.
"The anti-forestalling rules are about deferred payments to avoid tax. If it can be demonstrated that the deferral is normal practice and not being done as an avoidance measure, then HMRC won’t invoke them," he said.
Further reading
Abbeytax VAT Rate Increase Guide (59kb PDF)
HMRC VAT rate increase page
More VAT rate change coverage on AccountingWEB.co.uk
