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."