My client has been challenged on the trade sector chosen for VAT FRS, from application to the scheme in Sep 2013.
Letter received dated 29th January 2016 titled 'Check of VAT Returns'. No specific mention of percentage or trade sector, just that they are 'checking that you are operating the VAT Flat Rate Scheme correctly'.
HMRC asked for:
- A full description of the main business activity and the trade sector chosen
- The flat rate percentage used to calculate the amount of VAT due
- Monthly t/o for each period they are checking
- Amount of VAT charged for each quarter
- A breakdown of how the VAT declared has been calculated
- Provide invoice dates and payment dates
All to be sent by 19th Feb.
I'm not a rocket scientist, just an Accountant but it didn't take long to work out that the clients 'Other Business Services' at 12% was being questioned. They are a husband & wife Limited Company, circa £100k turnover for last five years with CT of around £8k each year, filed and paid 6 months early and no late or missed VAT returns. The squeakiest clean of my pretty tidy client portfolio.
I duly sent all information off to HMRC on 2nd Feb.
Letter received 6th March from HMRC 'further items needed':-
- Send us a detailed breakdown of what your business actually does so we can ensure you are using the correct trade class
The company is a web / graphic designer. My hunch is that HMRC are looking to re-classify them as IT Consultant at 14.5%, something my client insists they are not (which I agree).
Any others have experience of this? What would you do next if they respond insisting on IT Consultant and ask for the VAT shortfall (Approx £8k, though then less an adjustment for CT as therefore less profit.....interesting side discussion....).
A 2014 case discussed here https://www.accountingweb.co.uk/article/engineering-business-wins-vat-tr... looks to be very similar and focuses on the legality of the guidance to choosing the category. Any update since then?