HMRC have re-written Notice 733 covering Flat Rate Schemes for Small Businesses and included in the changes are some important amendments to the operation of the Scheme.
Following a recent Tribunal decision, HMRC have now agreed that bank interest is no longer included in exempt supplies so businesses that have included bank interest (at the insistence of HMRC) should now review the turnover for their Flat Rate Scheme and exclude any from any Flat Rate Scheme calculations.
There is a strong argument that businesses should review previous Flat Rate Scheme calculations where bank interest has been included and reclaim over-paid VAT.
If you want any further advice on this or any other matter, then please contact your usual consultant on 01962 735350.
Since the introduction of the Flat Rate Scheme, HMRC have always been of the opinion that, irrespective of a businesses activities, any bank interest received is also subject to VAT using the relevant Flat Rate Scheme percentage. This created an anomaly, as bank interest is normally treated as exempt from VAT, and is often disregarded for other VAT calculations as being passively earned – i.e. not earned as a result of any business aim or purpose.
However following a decision by the First Teir Tribunal, in which The VAT Consultancy acted in a supportive role, the tide has now turned. In the joined cases of Fanfield Engineering Limited and Thexton Training the Tribunal has determined that bank interest does not form part of the relevant turnover for the purposes of the Flat Rate Scheme calculations.
This is a sensible conclusion, however, we would advise that businesses do not assume that all bank interest will be excluded from Flat Rate Scheme calculations. Businesses operating the Flat Rate Scheme should review the income included for the scheme calculations, and make sure that the appropriate rate is being applied.
If you would like further advice please contact Karen Mulcahy, firstname.lastname@example.org or call on 01962 735350
The recent rise in VAT has brought to light the benefits of the flat-rate scheme with many self-employed people and SME’s actually profitting from operating it. We’ve put togther our guide to help you work through the benefits and potential pitfalls of using the flat rate scheme.
What is the Flat Rate Scheme (FRS)?The Flat Rate VAT scheme was introduced in 2002 and is available to all small businesses or sole proprietorships. The FRS differs from standard VAT accounting as you pay a percentage of turnover rather than paying VAT on the difference between sales and purchases. So, while you continue to charge clients the newly introduced 20% VAT rate, you can potentially give a smaller percentage to the taxman. The FRS rate differs from sector to sector but for IT contractors the norm is 14.5%.
What are the advantages of the FRS?The FRS helps to simplify VAT calculations and record keeping. This is particularly helpful to smaller organisations that may not have the time or expertise to conduct their accounting in the traditional way (and, bearing in mind the increasingly severe penalties that can be charged for errors, this can only be a good thing). It shortens the process, removing the need to keep a record of VAT charged for each individual sale or that paid on purchases. However, you do still need to show a VAT amount on each sales invoice.
It might also save you money, for example:
Standard VAT CalculationTotal Billings £50,000
Output VAT 20% £10,000
Total invoiced £60,000
VAT reclaimed through purchases £750
Total payable to HMRC £9,250
Flat Rate Scheme CalculationTotal Billings £50,000
Output VAT 20% £10,000
Total invoiced £60,000
Total payable to HMRC at 14.5% of T/O £8,700
In addition, if you are in your first year of business you can benefit from a 1% reduction to your FRS rate.
Who Stands To Benefit From The Flat Rate VAT Scheme?Largely contractors are likely to benefit from the scheme, though this depends on turnover and expenses as the higher your sales turnover, the more likely it is to be beneficial.
Whilst the rates increased on January 4 2011, reducing the possible profit made, there are still many people who could benefit.
The rates alter depending upon your business, ranging from 4% to 14.5%. For those working in computer and IT consultancy or data processing the rate has increased from 13% to 14.5%.
Visit the the FRS page on HMRC’s website to find out your flat rate.
What are the disadvantages?There are rules and exceptions governing the Flat Rate Scheme. For example if your turnover is more than £150,000 per annum, you will be unable to take part.
If you make use of the scheme, you cannot reclaim VAT on purchases, except in certain circumstances. As a result, the FRS works best for people who have few expenses compared to their fee income. VAT on expenses can only be recovered if they are capital items costing £2,000 or more or if the assets are still within the business on the date of registration.
How do you apply for the FRS?The Flat Rate Scheme can commence at the beginning of any VAT accounting period and it is very easy to change tax programmes. Simply download an application form from the HMRC website and post it to them.
Any other tips?Work done for EU businesses is outside the scope of UK VAT and is therefore excluded from the Flat Rate Scheme calculations
For more advice contact us on 01962 735350 or follow us on twitter: @vatconsultancy.
I have just responded to a query in Taxation magazine regarding someone who is using the Flat Rate Scheme.
The person in question is undertaking personal tax returns for UK and US individuals and has registered under accounting and bookkeeping services. Interestingly, they raise the question as to whether they should really be under ‘other business services’ which is a lower rate.
To help them decide what HMRC deem to be included within each of these headings they called the ever helpful VAT Helpline – only to be told it is a self-assessed tax!
Our answer to the query? It is simple when the under-used Flat Rate Ready Reckoner on HMRC’s website is referred to. This helpful tool provides examples of which trades HMRC believe fit within these sector headings. Under ‘Accountancy and Bookkeeping’ they include ‘income tax preparation services’. The case for a lower rate in this example is closed!
Do bear in mind however that accounting services to US individuals will be outside the scope and therefore not form part of the flat rate income….
Link to ready reckoner: