A welcome change to the Flat Rate Scheme for VAT
14th June 2016
The Flat Rate Scheme for VAT is an extremely popular scheme for smaller businesses. This is partly due to the scheme making the completion of VAT returns much simpler and reducing the risk of error; but also for a number of businesses it can generate an additional source of income.
Under normal VAT rules, the amount of VAT your business pays to or claims as a VAT refund from HMRC is generally the difference between the VAT received by your business from your customers and the VAT your business has paid out on its purchases.
Under the Flat Rate Scheme your business pays a fixed rate of VAT to HMRC (which is less than the 20% standard rate of VAT) and the difference between the VAT you receive from your customers and the VAT you pay to HMRC is kept by the business. To counter this, you can’t reclaim the VAT on your purchases, apart from certain capital assets that cost £2,000 or more including the VAT.
HMRC provides a list showing the percentage that applies to your business, which is determined by the industry you trade in. For example, Advertising is set at 11% and IT Consultancy is set at 14.5%. HMRC take the stance that you should tell them the category and percentage that you feel applies to your business and they will then tell you if they agree or not, which is rather unhelpful in situations where the appropriate category is slightly unclear.
Following some recent tax tribunal cases HMRC has recently rewritten VAT Notice 733: Flat rate scheme for small businesses, in order to make the appropriate choice of category easier to make.
One of the main issues was that prior to this rewrite HMRC maintained that all consultants should select the category ‘Management Consultants’, which carries a Flat Rate Scheme percentage of 14%. However, this position was maintained for those who would not describe themselves as Management Consultants, such as Employment or Marketing consultants.
The rewritten VAT Notice means that those who believe they should not be treated as Management Consultants can now change their category to Business Services Not Listed Elsewhere, which carries a Flat Rate Scheme percentage of 12%. This will potentially save those able to switch a considerable amount VAT.
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