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VAT flat rate scheme causing trouble

10th May 2012
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The flat rate scheme for VAT continues to cause problems for accountants and advisers, according to VAT experts.

In a SWAT UK tax lecture in Bristol, Robert Neeve highlighted a theoretical scenario where a married couple own and let properties individually, and also jointly. In his example, the husband’s business is subject to the flat rate scheme at 10% for VAT, which applies to all his business income including his rentals from his individual property and future rentals of the former home.

However, Neeve pointed out that the flat rate would not apply to his share of income from the jointly owned property if the taxable person is accepted as the couple, rather than the husband.

Neeve said that in such a situation, this point should be confirmed with HMRC to ensure it will accept the couple as a separate VATable person.

“HMRC is starting to pick up on this a bit, but it’s not actively targeting it,” he said.

Numerous niggles about the flat rate scheme have been posted in recent weeks by AccountingWEB members in Any Answers, and Neil Warren has raised a number of input tax issues and potential pitfalls in recent articles for Taxation magazine.

“The flat rate scheme is about simplification and often the biggest problem is about choosing the right category, such as where does a plumber fit in,” Warren told AccountingWEB.

With 55 categories to pick from, it’s often a case of finding the “nearest best fit”. If there’s no exact match, most end up going into the 12% rate for “other business services”.

He added there are other issues around the £2,000 or more limit; the treatment of capital assets rather than services; and selling assets such as a business car.

VAT expert Les Howard agreed with the point about choosing the correct category: “It’s difficult for a lot of small businesses looking at a list of 50 to 60 categories - two might fit, or maybe none.”

He said that the wrong category issue is the most common problem; if it’s picked up by HMRC the sums for the business can be huge.

“The key point is that the first decision has to be made with some guidance. There’s a good reason they’re in the category that they’re in and this can help protect them,” Howard added.

In a recent Any Answers, ShirleyM, voiced frustration with clients who decide to prepare their own VAT returns after switching to the scheme.

“What do you do with clients that want to DIY, but don't listen to you, and won't pay for training or spend time finding out how to do it properly?”

Portions of this article are derived from Robert Neeve’s SWAT UK lecture ‘Case Studies in Direct Tax’. Later in the year AccountingWEB will compile a comparative review of the different tax lecture providers.

Replies (4)

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By david5541
10th May 2012 12:43



DONT understand how the flat rate of vat is applied to SALES + standard rate VAT(i.e. gross).

the client has to charge customers standard rate vat and AFTER/WHEN the quarter ends apply the flat rate to gross sales.

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By david5541
10th May 2012 12:57

fixed rate %age compliance

make sure once you have registered for FR vat you ensure the FR section of the variations team in HMRC have logged it.


Its surprising how often the trade description is not correctly recorded at the HMRC end:

Our clients' FR registration was logged as "miscellaneous" on the vat system. He had a FR back tax assessment(we accounted for FR vat using the right rate for his trade but because the vat registration document did not correctly describe the trade the surcharge was raised)- the miscellaneous fr is higher than motor haulage/courier rate(for obvious reasons because of the high duties on fuel).

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By Tom 7000
14th May 2012 16:22

Surely this is academic?

If your business is big enough to be vat registered, then you should a LTD anyway and any rental income in your and your wifes joint names to mitigate CGT....basic stuff chaps....

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By Huw Williams
15th May 2012 15:12

VAT threshold not so big

VAT applies to businesses with turnover under £100,000.  If you have a business with high costs of sale, you can easily need to register for VAT without having the size of business which warrants incorporation.  Of course, you might not want to use a flat rate for one of these businesses.

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