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Flat Rate and VAT Domestic Reverse Charge

Flat Rate and VAT Domestic Reverse Charge

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Hi Guys,

I have a client who is registered on the flat rate scheme for VAT. He works in the construction industry and is Gross Status.

His employer are now not paying the VAT on his invoices and paying them directly to HMRC. But obviously this amount is too high as historically he has been @ 16.5%.

 

Any help on how to process this on a VAT return?

 

Ta all.

Replies (9)

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RLI
By lionofludesch
17th Sep 2021 18:17

You should review this fella's VAT liability immediately.

He may well need to leave the FRS. It may no longer be for him. This was very well advertised in the months leading up to introduction of the DRC.

Employer ? Does he have one ?

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By doubletrouble
17th Sep 2021 18:33

DRC has been around for a while now so you should really have looked at this before, can not see any benefit from being on the FRS

As Lion asks, Employer??

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Danny Kent
By Viciuno
17th Sep 2021 20:40

The figure he needs to put on the VAT return is amount of his sales including VAT (which are 0% rated on the DRC invoices). If there are significant DRC sales then this can be very costly.

Don't think there is much scope for leaving the FRS retrospectively though so afraid your client may need to bite the bullet on this one :

https://www.gov.uk/hmrc-internal-manuals/vat-flat-rate-scheme/frs4100

As an aside, don't see how the FRS % can be "too high". The scheme isn't to save VAT registered business money, but to save them the hassle of keeping proper records.

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Replying to Viciuno:
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By rmillaree
18th Sep 2021 12:39

Viciuno
"The figure he needs to put on the VAT return is amount of his sales including VAT (which are 0% rated on the DRC invoices). If there are significant DRC sales then this can be very costly."
Is this correct - i thought it was simply the case that such sales were excluded from the the flat rate scheme in which case normal reverse charge rules would apply (ie no output vat and value of sale being included in box 6) . Must admit as 50 something my brain has been somewhat bashed by all these changes recently - so apologies if i am wrong and you are right Viciuno.

Notice 735
10.8.1 Flat Rate Scheme
Supplies that the reverse charge applies to are excluded from the Flat Rate Scheme. Any such supplies you’ve had and made should be accounted for under the reverse charge provisions.
https://www.gov.uk/guidance/the-vat-domestic-reverse-charge-procedure-no...

khalm0
Can you elaborate on your question somewhat - being frank your post suggests you may not fully understand how the flat rate process works.- apologies if you do and its simply my lack of ability to understand your point here. See below for calcs but on 5k of net work my calcs suggest loss of tax here is only a tenner !

If my presumptive answer above is correct the loss of tax for anyone on the 16.5% flat rate category is so minimal as to be inconsequentual as 19.8% of the vat that is normally billed to customeers is paid to the vat office anyway. Are you aware of this fact - ie the 16.5% is clauclated on gross vat inclusive sales not net sales.
You are hopefully also aware it's always normal vat being billed the flat rate only evr comes into things on return calcs - not how you bill.

On my calcs if we take 5k net value of work done - gross value 6k the flat rate vat payable is 990 of the 1000 being billed - so leakage is only a tenner so i don;t see what the issue is here !!
- if this client is permanently on the 16.5% rate they are almost certainly better of swapping to normal vat unless their expenses are almost non existent or they hate the other way of working out vat.

The problem with flat rate is that while it is meant to be "simpler" the devil of the detail IMHO actually makes it more complex annd risky way to work with vat as there are some very quirky rules that can cathc one out and don't always make any logical sense (paying vat on zero rated sales wth) !!

Apologies if any of above is wrong peeps.

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Replying to Viciuno:
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By legerman
18th Sep 2021 12:47

Viciuno wrote:

The figure he needs to put on the VAT return is amount of his sales including VAT (which are 0% rated on the DRC invoices). If there are significant DRC sales then this can be very costly.

Don't think there is much scope for leaving the FRS retrospectively though so afraid your client may need to bite the bullet on this one :

https://www.gov.uk/hmrc-internal-manuals/vat-flat-rate-scheme/frs4100

As an aside, don't see how the FRS % can be "too high". The scheme isn't to save VAT registered business money, but to save them the hassle of keeping proper records.

You cam leave the FRS whenever you want. All you need to do is write to VAT and let them know. I did this with my only FRS client back in March, when DRS first came in. You can't rejoin the scheme for 12 months if you leave

https://www.gov.uk/vat-flat-rate-scheme/join-or-leave-the-scheme

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Replying to legerman:
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By rmillaree
18th Sep 2021 13:11

Interesting use of words here by hmrc in the linked manual

"You should normally refuse an earlier date where the business has already calculated its VAT liability for the period(s) using the FRS accounting method. This is because the FRS exists to simplify VAT accounting and record keeping, so allowing a business to spend less time on VAT. Allowing a business to withdraw from a retrospective date in these circumstances would undermine the purpose of the scheme"

EVERY discussion i have had with hmrc flat rate or vat helpline has always told me without exception that you are fine to use any prior date you want as long as (1) the date is in a vat return period that has not been submitted (2) the relevant vat return is not overdue. There is a not a massive inconsistency here as presumably hmrc give any business the benefit of the doubt that as far as they are concerned vat is not calculated till its submitted. I will enusure in future i will always make my application to leave flat rate before i have done the final checks on said vat return :)
Obviously with regard to leaving on dates that don't qualify on both points 1 and 2 above hmrc may be ameniable to help but will probably default to saying no unless you are adept at arm twisting with regard to the vat office.

I have always done my application to leave via email application and as of yet this has alwasy worked albeit response is slow - the only annoying bit here is you dont get get an email confirmation to say your emaoil has ben received - not great bearing in mind it may be 4 months before you here from them - thankfully my requests do seem to be on file at hmrc even if not actioned as of yet.

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Replying to rmillaree:
By Duggimon
20th Sep 2021 10:00

rmillaree wrote:

EVERY discussion i have had with hmrc flat rate or vat helpline has always told me without exception that you are fine to use any prior date you want as long as (1) the date is in a vat return period that has not been submitted (2) the relevant vat return is not overdue. .

That's what the bit of the manual you quoted says, a retrospective withdrawal should be refused when the date requested falls within a return period that has already been filed.

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By DKB-Sheffield
18th Sep 2021 14:35

Hi

Have you looked here for a Plain English guide?

https://www.accountingweb.co.uk/tax/hmrc-policy/domestic-reverse-charge-...

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Jason Croke
By Jason Croke
18th Sep 2021 17:25

DRC transactions are not included in the flat rate calculation, so its not a case, like zero ring, where you end up paying over VAT for something that isn't VATable. Any sales which are not DRC can still fall under the flat rate but then it gets confusing, especially when flat rate was designed to be a simplification and so this is why many builders simply came off flat rate scheme.

You can't come off flat rate retrospectively as HMRC would see that as you trying to gain an advantage (ie, if you do a few months realise you're better off being on flat rate or normal VAT then if you could go back in time then you'd be better off and this is what HMRC don't like), so you can come off flat rate before filing the next return - for example if your Qtr was say Jul-Aug-Sept, you can change at start of July as you've not filed that return as yet and would make the Jul-Aug-Sept, so you could come off flat rate or join flat rate (depending on what scheme you're already on).

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