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VAT: Builders must review flat rate scheme

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20th Aug 2019
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Neil Warren explains that the new reverse charge rules for the construction industry mean that many builders should leave the flat rate scheme on 30 September.

The new reverse charge rules for the construction industry, which are due to take effect on 1 October 2019, have attracted a lot of interest from accountants. One AccountingWEB member recently contacted me with a very important question: how will the new rules affect builders that use the flat rate scheme?

My answer is simple: if most or all of the work carried out by the builder will be subject to the reverse charge, ie the builder will no longer charge VAT on his work, it will make sense in most cases to exit the flat rate scheme (FRS) very quickly.

Three flat rates

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Replies (5)

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By Andrew1946
21st Aug 2019 18:03

Most interesting, however, without being pedantic, my understanding is if as per example 1 the T/O of £240K exceeds the FRS of £230K will not this builder be forced to join the Standard VAT reporting Scheme

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By fawltybasil2575
22nd Aug 2019 12:38

@ Andrew1946.

To respond to your question, and as Neil's guidance states:-

" . . . . a business does not need to leave (the scheme) until annual sales exceed £230,000 including VAT on the anniversary of when it joined the scheme".

[As a small point, I have noticed in the past that the words "the anniversary" are likewise included in HMRC's guidance: in my submission, and as I pointed out to HMRC some years ago, the words "the anniversary" should really be "each anniversary", since one has to consider on each and every anniversary date, whether one still qualifies to use the FRS scheme].

Neil has, re his example, stated that the "annual sales (all standard-rated) ARE [my emphasis] £200,000 plus VAT". Given that it is implied, in Neil's example, that "John" is VALIDLY operating the FRS, then it is likewise implied that, at the LAST anniversary date, the previous year's sales had NOT exceeded the £230,000 threshold (ie that the increase in annual sales to £240,000 had only arisen AFTER that last anniversary date).

Such being the case, then "John" is ONLY required to consider whether he is entitled to remain in FRS on the NEXT anniversary date [even if, hypothetically, the annual sales had increased, in the meantime, to (say) £600,000].

On a general level, the central thrust of Neil's article is valid, and ALL builders operating FRS, and agents acting on their behalf, should NOW consider whether to notify HMRC of leaving the FRS with effect from 1 October 2019 (whether such notification is advantageous can only be determined by considering to what extent the reverse charge rules will affect the amounts payable to HMRC on their VAT Returns).

Basil.

Thanks (2)
Replying to fawltybasil2575:
Quack
By Constantly Confused
22nd Aug 2019 14:07

fawltybasil2575 wrote:

@ Andrew1946.

" . . . . a business does not need to leave (the scheme) until annual sales exceed £230,000 including VAT on the anniversary of when it joined the scheme".

I, for one, hadn't realised it was an annual check, so thanks for that Basil.

Thanks (2)
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By cne333
23rd Aug 2019 09:15

Where a supplier has a mix of CIS (reverse charge) sales and end-user sales, am I right to conclude that the FRS will continue to (and only) apply to the end-user sales because "reverse charge supplies are excluded from the supplier’s return"?

Also will the CIS (reverse charge) sales still count towards turnover for the FRS annual limit review?

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By Andrew1946
26th Aug 2019 23:42

Basil, I can only speak from our own personal experience whereby my company breached the £230k threshold during one particular quarterly VAT period, based upon a 12 month rolling average. HMRC wrote saying as from a certain date in the following quarter (mid month) that we would cease to be in the FRS. Fortunately having argued that the previous quarter was exceptionally high due to a non continuing contract,, and by the Year End the level of Turnover would be likely to be below the £230k threshold, HMRC accepted this reasoning and reversed their decision

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