VAT flat rate scheme guidance changed

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Just three weeks ago we reported that the VAT flat rate scheme guidance was flawed. The ATT had highlighted that HMRC’s practice was costing traders, as they were forced to pay more VAT to HMRC under the flat rate scheme than the law required.

HMRC has now responded with a welcome rewrite of VAT Notice 733: Flat rate scheme for small businesses. This notice now reflects comments made by judges in tax tribunal cases that businesses should ‘use ordinary English’ in choosing the flat rate trade category.

HMRC previously insisted that all consultants should chose the category ‘management consultants’ (flat rate: 14%), even if they were consultants in health and safety, employment, or marketing. Now those businesses who do not describe themselves as management consultants are free to choose the category ‘business services not listed elsewhere’ (flat rate:12%).

Another area that caused confusion was the advice in para 4.4 of the previous version of VAT Notice 733, that all engineering consultants and designers should choose the category for ‘architect, civil and structural engineer or surveyor’ (flat rate 14.5%).

The first tier tribunal cases: SLL Subsea Engineering Ltd (TC4256) and Idess Ltd (TC3638) found that mechanical engineers were not civil engineers, so mechanical engineers could choose the category ‘business services not listed elsewhere’ (flat rate 12%). That advice has been removed from the new version of VAT Notice 733.

Neil Warren advises that the starting point for any business adopting the VAT flat rate scheme for the first time is to refer to the list of categories in the 1995 VAT Regulations, SI1995/2518, Reg 55K, in order to choose its trade category. In areas of doubt (e.g. where there is no specific category for the business description), HMRC offers assistance in the flat rate scheme manual at paras FRS7200 and FRS7300, which now reflect the recent court cases.

It is also reassuring to read that Notice 733 confirms: “HMRC will not change your choice of sector retrospectively as long as your choice was reasonable. It will be sensible to keep a record of why you chose your sector in case you need to show HMRC that your choice was reasonable”.

About Rebecca Cave

Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.

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13th May 2016 19:57

What about tax consultants who do not offer a book-keeping or accountancy service but deal with tax disputes? HMRC seem happy with my FRS% of 14% having inspected our records several years ago although we also offer a due diligence service for companies who trade in the alcohol sector which is now probably the largest part of our turnover. Does this mean that I am now able to change FRS to 12% [business services listed elsewhere.]? What FRS% is Neil Warren on if his turnover is eligible for the FRS?

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By Echo761
to Malcolm McFarlin
08th Aug 2016 14:12

I am a tax consultant... using 12% rate and HMRC signed it off in a letter.

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to Echo761
08th Aug 2016 15:06

I wrote to HMRC on 29/06/16 [letter sent by recorded delivery] to change my FRS to 12% but I am yet to receive a reply. How long did it take for you to receive your reply Echo 761?

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By Echo761
to Malcolm McFarlin
08th Aug 2016 15:26

Well... therein lies a story... It was last year and it took some time to get a reply but the reply ran to about 3 or 4 pages long and I was accused of using the FRS as part of some sort of VAT avoidance scheme (jeesoh!) and I also had "wickipedia" quoted to me as a source of the reasoning that HMRC would not backdate my claim to a change to the 12% from an earlier date. But i have had a letter with HMRC on another matter since February 2016... they signed for it then and it has been sitting in their system since then and been overlooked. They recently wrote asking for a reply.. which I had sent in February and they found when I called them. I am afraid you are in the position of "throw a six to start" in terms of how long it will take HMRC to reply, but good luck. There is always the e-mail system to chase it at; https://online.hmrc.gov.uk/shortforms/form/VATGenEnq?dept-name=&sub-dept...
good luck with that too, they replied to say a letter was in the post referring to my original letter..... nope it was a chaser from HMRC as above. It makes me laugh... better than crying I guess.

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to Echo761
08th Aug 2016 16:43

Thanks Echo 761 for your humorous reply. I'll get a box of tissues for HMRC. They don't quite lose out of course since it increases your profits on which you pay CT or SA tax.

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By TaxEye
16th May 2016 12:16

Can clients backdate claims if too high a % chosen in the first place?

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to TaxEye
16th May 2016 13:51

I had a client who registered themselves incorrectly and when I asked HMRC to change it they did but only from the start of the next month. They used the phrase that "you picked the incorrect rate" so therefore it's your fault so they won't repay.

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16th May 2016 16:31

"Computer and IT consultancy or data processing" is full of ambiguity.
"Software Publishing" is supposed to use this Sector although it is not data processing and is neither Computer consultancy nor IT consultancy.
Yet choosing "Retailing that is not listed elsewhere" which is more appropriate for selling my software, will likely be jumped on.

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18th May 2016 08:49

Is this change applicable retrospectively ? I was under business consultant at 14% but in truth I am a business broker and wish to be "other" business at 12% . Can I "reclaim" overpaid 2% ?

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to Flying Scotsman
18th May 2016 09:36

Interesting question. The HMRC guidance states you must notify them within 30 days if you wish to change your FRS% which implies that it can't be done retrospectively. However, this did not prevent HMRC issuing backdated assessments for incorrect choice of FRS% although, as this article states, the Tribunal did not support HMRC with regard to some of the appeals against the HMRC FRS decisions/assessments. Maybe it was one rule for HMRC and one for businesses with regard to applying for the FRS% to be changed retrospectively!

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By Echo761
to Malcolm McFarlin
08th Aug 2016 14:17

HMRC recently went on a crusade against the FRS and issued assessments like they were going out of fashion. They even set up a "task force". A lot of people paid the assessments as they were effectively "bullied" into it by HMRC. They did not have insurance in place and the cost of fighting it was not cost effective against the amount assessed or the uncertainty of winning their case. This was a shocking tactic and the view of most of the tribunal cases supported this view that HMRC were... having a laff! But yes unlikely to get them to agree repaying you where you chose the wrong rate, completely unfair treatment though when you consider the same basis was used for their assessments.

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By AJ05
02nd Aug 2016 17:20

Thank you for this valuable info, Rebecca. Great news going forward. I say going forward, cause I honestly don't think HMRC will refund you for previously choosing a higher % in the past.

I maybe wrong, you never know do you?...

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By AJ05
02nd Aug 2016 17:21

Thank you for this valuable info, Rebecca. Great news going forward. I say going forward, cause I honestly don't think HMRC will refund you for previously choosing a higher % in the past.

I maybe wrong, you never know do you?...

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By sigcima
01st Sep 2016 10:16

What a bad joke it is that HMRC bury interpretations to rules in obscure guidances which are not known or understood to the average business owner, who rather is led to gov.uk to be "informed" on the rules of paying the correct taxes.

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19th Nov 2016 12:18

Bloody good article, I could have over looked that.

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