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VAT FRS and other income

VAT FRS and the legislation

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So, I have a client within the VAT FLAT RATE SCHEME. He is the sole proprieter of a nightclub.

He has recently purchased a residential property for rental and has set up a contract with a VAT registered management agent for rental income received and HMRC VAT have said that this income must be included in his VAT returns.

They have said that because the gross rental income is small and below 10% of his overall turnover then must be included withing the VAT FRS at the nightclub VAT FRS rate.  So, if the management company invoices my client invoices gross including VAT at 20% for the monies he receives, my client pays over VAT to HMRC at a FRS rate which is less than what the management company reclaims in their purchase invoice.  This cannot be right as HMRC will be losing out?

Am I seeing this wrong, can anyone point me to VAT legislation on this one and does anyone have practical experience of how the VAT FRS works if clients have more than one business?  Thank you. 

 

 

 

Replies (10)

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By Wanderer
18th Oct 2019 10:07

davidbarry wrote:
So, if the management company invoices my client invoices gross including VAT at 20% for the monies he receives, my client pays over VAT to HMRC at a FRS rate which is less than what the management company reclaims in their purchase invoice.  This cannot be right as HMRC will be losing out.
This has forever been the way with the FRS. (Subject to LCT rules / amounts of input tax). And was the very reason why they bought in the Limited Cost Trader rules.
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chips_at_mattersey
By Les Howard
18th Oct 2019 10:43

VAT Regulation 55K refers to the main business activity, but does not go further how you would determine that. But I think a 90:10 split is obvious!
All the income from the other business activity must be included as it is business income.

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Replying to leshoward:
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By davidbarry
20th Oct 2019 11:55

Understand

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By spidersong
18th Oct 2019 12:38

Sorry I may have missed something but I'm lost on how HMRC are losing out?

The owner is receiving what would be exempt income (residential letting) and pays HMRC VAT on the gross value of that, bonus for HMRC.

The management company charge him VAT that he can't recover as under FRS, so no loss for HMRC.

They get the full VAT from the management companies charge (unless they're flat rate themselves) and only pays them back VAT on their taxable costs which unless they're making a loss will be less than they pay.

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Replying to spidersong:
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By Wanderer
18th Oct 2019 12:52

spidersong wrote:

The owner is receiving what would be exempt income (residential letting) and pays HMRC VAT on the gross value of that, bonus for HMRC.

At this stage we don't know it is residential letting. OP states that it is a residential property for rental but hasn't actually clarified that it is residential letting / exempt.
There's a good chance that the OP is confused about the relationship with the management company. It may be true however it's not the norm that the property owner invoices the management company for the rent. Normally (if it is a residential letting) the management company acts as agent for the owner in collecting the rent and passing it on.
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Replying to Wanderer:
RLI
By lionofludesch
18th Oct 2019 15:47

Wanderer wrote:

At this stage we don't know it is residential letting. OP states that it is a residential property for rental but hasn't actually clarified that it is residential letting / exempt.

You think the guy may be applying for planning permission to used this house as an office or something ?

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Replying to lionofludesch:
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By Wanderer
18th Oct 2019 15:57

Dunno but it could be:-
Furnished holiday lets?
Short term rental as there's some strange agency arrangement?
AirBnB?

That's the problem with internet forums, questioners rarely give enough detail.

Basil's alluding to the same point below.

If it's residential lettings as suggested then the complete opposite to what the OP says is probably the case.

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By johnhemming
18th Oct 2019 12:42

If you have written advice from HMRC about how to do something I would assume the legal principle of estoppel would apply.

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By fawltybasil2575
18th Oct 2019 13:39

@ davidbarry (OP).

I believe that clarification of your words “a residential property for rental” is ESSENTIAL before one can be definite in providing a full response to your question.

If, as I would assume would apply in a substantial majority of “residential property” cases, the income is indeed “residential lettings” income, then (as has been alluded to above) your assumption re the HMRC’s “losing out” is invalid, since the exact reverse would be the case.

Furthermore, if indeed the income is indeed "residential lettings" income, then one should “do the maths” to determine whether (i) withdrawal from the FRS is now advisable or whether (ii) consideration should be given to validly changing the “status” of (a) the nightclub and/or (b) the rental income entity [commercial considerations might outweigh however the potential benefit from such status change(s)].

I assume that the nightclub is a small one, or perhaps operates on limited hours, since the vast majority of nightclubs would IMHO have a turnover materially above the VAT FRS threshold (perhaps you would comment thereon).

Basil.

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By Hut15
21st Oct 2019 11:21

My understanding of the FRS is that it is there to simplify accounting for VAT. Of course, many people choose FRS because they have worked out they make more profit that way, but that is not its purpose. If you are losing out by operating the FRS then you have the option to drop it and use the standard method of calculation.

I did have a client with a similar situation to yours - he had a sole trade plus some rental properties, and followed flawed advice to change to FRS because he would make a profit, but he had not considered the rental properties, and once he had opted into FRS discovered to his horror that he was having to pay VAT calculated on his total turnover including his previously exempt rental income. He was a lot worse off until he could go back to the standard method!

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