Relevant turnover in transition from FRS

What are the effective VAT rates for an FRS trader moving from FRS to standard VAT?

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I am a bit confused by some potentially contradictory advice/gaps in VAT 733 and, in particular, this Taxation article

The question is probably best illustrated by way of example. Is the following correct?

VAT registered trader with a quarter to 30 April. FRS cash basis currently at, say, 14.5% FRS rate.
Will be limited cost trader and so has decided to go onto Standard VAT cash accounting from 1 May.
Bills say £18,000 gross in March (all for work done, no billing in advance) and £6,500 gross in April.
March billings received £6,000 in April and £12,000 May. April billings received May.
Will spend approximately £150 on qualifying goods in April.

Cash received to end March is clearly at 14.5%.
Cash received in April is at 14.5% because the supply was made pre April or because qualifying costs >2% of billings or because >2% of receipts (seems to be ambiguous advice in this area but comes out the same whichever way).
Cash received in May
  The £12,000 from the March billings is presumably at 14.5% rate because that was the rate at the time of supply
  Any cash received in May for billings re May is just on the Standard VAT regime.
  What about the May receipts of April billings (£6,500)? Are these at 14.5% because the £150 purchases pulled April into that rate or is it at 16.5%?

I think it is probably the former which is quite neat as it uses the £150 purchases to pull both the April receipts and the May receipts into the old rate.
Presumably the corollary of that is if the £12,000 is received in April, both the April receipts and the May receipts of April billings will all be at 16.5% (Ouch!).

I imagine, for traders without a March quarter date, this could be quite a common scenario with the opportunity to cram in some qualifying expenditure before switching to the standard cash accounting scheme.

What are your views?

Replies (7)

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By Paul Scholes
13th Apr 2017 15:27

Hi - from what I can tell you are correct, with the £6,500 being at 14.5%.

As the tax rate is determined at the tax point, ie the invoice, the £12K would always be at 14.5%

Thanks (1)
Replying to Paul Scholes:
By Lawrence82
07th Feb 2018 11:29

Very late to the party here but thought this might still be cropping up for some people during the preparation of accounts so I will leave my thoughts (agreed by our VAT advisers) which unfortunately contradict your POV Paul and are,

Any payment received after 01/04/17 under the cash basis are subject to the new 16.5% rate even if the invoice was raised prior to that date and the work undertaken prior also.

Notice 733 only gives one line on the matter (section 9.1) "Apply the flat rate percentage to the VAT inclusive supplies for which you have been paid in the accounting period."

They have not specified any particular treatment of 'transitional payments' and as such there are none, and the business is effectively stuffed.

This seems particularly unfair of HMRC given they demand apportionment of VAT at either 14.5% or 16.5% (for example) for payments made in advance of 01/04/17 for work covering the transitional period but force businesses using the cash basis to use 16.5% when the payment is received after but relates to work prior.

HMRC are managing to eat their cake and have it too (Manhunt: Unabomber!) it seems.

Thanks (0)
Replying to Lawrence82:
By Paul Scholes
08th Feb 2018 11:51

Hi Lawrence - how about para 9.2?

9.2 Change of tax rate or insolvency
In these special circumstances, the basic turnover method tax point will determine the treatment of your supplies.

Thanks (0)
Replying to Paul Scholes:
By Lawrence82
08th Feb 2018 13:00

I'll be honest, we hadn't noticed that section!

However, it still isn't clear as far as we are concerned. It does specify a "change of tax rate" and that hasn't happened, the "tax rate" is the same, 20%, it is just the way in which the flat rate 'rate' is applied to that, that has changed. We (well my boss & our VAT advisers) think it's still vague enough to be interpreted either way.

I personally would take it to mean invoice date, not least because that would be fairer, but it's certainly arguable either way though! Particularly as that section was not changed as a result of the update to the notice following the low-cost trader rules, which suggests it is referring to an actual change in the main rate of VAT in the future...

A curious one indeed!

Thanks (0)
Replying to Lawrence82:
By Paul Scholes
08th Feb 2018 14:20

Yes, I thought you'd say that :)

For my sins I spent months, a couple of years back, digging into most aspects of the FRS and the message I got from both my own consultants as well as HMRC staff, was that the legislation was ill considered and dumped onto us with insufficient thought over how it would work in practice. Consequently, at the time, 75% of all queries received by my VAT consultants concerned the FRS.

The golden rule I've followed ever since, when getting stuck in FRS ambiguity, is to follow the best outcome for my client, or even the route that made most sense and, for me, unless the text specifies otherwise, tax point is gospel.

Thanks (0)
By paulwakefield1
13th Apr 2017 16:33

Thank you Paul.

Thanks (0)
By Digit Dabbler
19th Apr 2017 12:24

I suspected HMRC would make the transition complicated so my clients' wrote to Revenue, as you have to when you leave FRS, and said they were leaving FRS at end of March even if that was in the middle of their VAT period. They asked HMRC to let them know immediately if they had a problem with this. Needless to say HMRC have not been in touch with any of them. Guidance says you can leave at any time.

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