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VAT flat rate scheme guidance is ‘flawed’

20th Apr 2016
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HMRC is ignoring verdicts of tax tribunals, and as a result, causing small businesses to pay a higher rate of tax than required, according to the ATT.

The ATT is urging HMRC to provide clarity to VAT flat rate scheme users who face unexpected penalties and pay increased tax. Small businesses unable to categorise their scheme from the 51 categories available are being forced to choose from the list, rather than pick the ‘business services not listed elsewhere’ category.  

As an example, HMRC advises in its published guidance that consultants should “choose management consultant” if they do not fit into a specific category, explaining that “this sector is not restricted to businesses that fit the traditional idea of management consultancy’.

But ATT warns, as a result of this, that consultants choosing management consultant will pay 14% VAT rate, higher than the ‘business services not listed elsewhere’, with a flat rate of 12%.

This not only affects consultancy, as mechanical engineers, for example, are expected to be classified as ‘architect, civil and structural engineer or surveyor’.

Ironically, the scheme was originally launched to simplify VAT assessments for small businesses.

In a number of flat rate VAT cases which went in favour of the taxpayer the judge advised HMRC to review its guidelines. Back in 2014, a mechanical engineer who won his case against HMRC who re-categorised the engineer's business as an ‘Architect, civil and structural engineer or surveyor’, which meant that his flat rate of VAT increased from 12% to 14.5%.

VAT consultant Neil Warren said that the verdicts from these cases like that confirm that business owners should use “ordinary everyday words when choosing thier category” for the VAT flat rate scheme. By disregarding the courts views, Warren says, “HMRC’s thought process is flawed”.

This has not stopped HMRC from “issuing retrospective tax assessments” because they deemed the original choice of sector to be unreasonable, says the ATT.   

'Hunt for perceived easy pickings'

AccountingWEB member RedFive flagged this issue last month on Any Answers after his client, a web designer, was challenged on his chosen trade sector. The client received a letter titled ‘check of VAT returns’. It didn’t mention percentages, just that it was “checking that you are operating VAT flat rate scheme correctly”.

According to RedFive, HMRC required:

  • A full description of the main business activity and the trade sector chosen
  • The flat rate percentage used to calculate the amount of VAT due
  • Monthly t/o for each period they are checking
  • Amount of VAT charged for each quarter
  • A breakdown of how the VAT declared has been calculated
  • Provide invoice dates and payment dates

At the time, the AccountingWEB member assumed HMRC was looking to “re-classify [his client] as an IT consultant” which incurs a 14.5% rate.

Contesting HMRC’s guidance, Red Five said: “The HMRC manual which gives fuller descriptions than the overview list Computer and IT Consultancy as "Data processing and database activities, Hardware and software consultants or software publishing"

“My client does none of these things. In fact they would be more closely related to the Advertising sector which carries a 11% rating.”

While RedFive’s client didn’t have to pay any additional tax, he said this example was proof that HMRC “could be on a hunt for perceived easy pickings”.

Urging HMRC to provide clarity, Michael Steed, ATT president, said:We feel it is the right time for HMRC to amend its guidance to accept that honest small business owners have adopted the correct category as intended by the legislation and to ensure people are not paying too much tax." 

Replies (2)

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Chris M
By mr. mischief
21st Apr 2016 06:58

I've had 2 of these

In one the client gave up even though I thought he would win.  In the other HMRC had no realistic chance of winning the way they have defined the sectors.

As I have posted before here and elsewhere:


To define a mechanical engineer, a project engineer, a project manager and numerous other very common job titles and contract descriptions that are not on their list!!

NONE - repeat NONE - of my clients is working under the terms of a consultancy agreement, or the other variations of what is generally accepted as the definition of consultancy.  NONE - repeat NONE - has the words Consult, Consultants or Consultancy in their contracts.

To 99% of the population of the UK these people are not consultants.  The other 1% all work for HMRC.

If you want these people to pay more tax, define their sectors properly and stick 13% or 14% on them.  Do not try and pretend they are consultants.




Thanks (1)
By new2uk
26th Apr 2016 06:35

I know of a case where the company chose other business services, HMRC queried it, then decided not to issue a VAT number.

The company then hired a firm to register the company for VAT. The firm appear to have done nothing except take money for a service never provided. The company then traded over the threshold and sort advice from another accountant who advised them to do a members voluntary liquidation as the director had been unwell for some time. It is all in a big mess now and the liquidators are trying to sort out late VAT registration and penalties without success.

Any advice appreciated!

Thanks (0)