Flat Rate Scheme

VAT Question

My client has previously been using the Flat Rate Scheme (FRS) but now wishes to change to normal accounting method. He applied to leave with effect from the start of his current VAT period but HMRC have refused this date, advising his leaving date will be the start of the next VAT period. Can my client leave retrospectively?

VAT Answer

Essentially, yes.

Case Law shows that Tribunals agree retrospective entry to, and thus by extension, exit from FRS from a date from which no VAT returns have been submitted as from that time the taxpayer has not taken advantage of the purpose of FRS, this being the reduced burden for record keeping and administration.

This is now supported by the wording of HMRC guidance at para 12.1 of VAT Notice 733 which states “HMRC will agree to a date in the previous accounting period if you have not already submitted your return under the flat rate scheme.” as well as HMRC’s online guidance in FRS4100 which states “You should normally refuse an earlier date where the business has already calculated its VAT liability for the period(s) using the FRS accounting method. This is because the FRS exists to simplify VAT accounting and record keeping, so allowing a business to spend less time on VAT.”

As your client has yet to submit the return for his current VAT period you should request that HMRC reconsider the exit date on the basis of their own guidance.

Tony Pocock, Vantage VAT Consultant

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Flat Rate Scheme

Flat Rate Scheme – changed from 1 April 2017 – Limited Cost Traders

With effect from 1/4/2017 HMRC introduced new rules to the Flat Rate Scheme (FRS) to try to reduce what they see as significant financial benefits received by some businesses using the scheme.

Under the new rules businesses will have to use a new FRS percentage of 16.5% when calculating the VAT due on their sales if they fail to meet these new rules. HMRC have referred to such businesses as Limited Cost Traders (LCT).

This additional test will obviously make use of Flat Rate Scheme much less unattractive to some businesses so it is important to consider your businesses circumstances and whether they would likely be a Limited Cost Trader before deciding to opt for the scheme.

What are the new rules?

If your VAT-inclusive expenditure on relevant goods is not more than 2% of your FRS turnover in your VAT period or is not more than £1000 for annual VAT period (£250 if your VAT period is a normal quarterly VAT or £83.33 if your VAT period is a monthly VAT period) then you will be a Limited or Low Cost Trader and will be forced to use the 16.5% rate.

Do all FRS users have to consider these new rules?

Technically, yes, although if you buy and sell goods as your main business activity, for example if you are a retailer, manufacturer or restaurant, you are much less likely to fail the test than if your main business activity involves you providing services and you have little or no expenditure on goods.

What are relevant goods?

This is the most important issue in the new rules but unfortunately there is no definitive list of what you can treat as relevant goods, although HMRC provides some guidance within para 4.6 of HMRC VAT Notice 733.

However, from queries that have already been asked of us, here are a few pointers:

  • The receipt of any type of service can never be a receipt of “relevant goods”.
    Comment: It is surprising the number of calls we receive asking whether ‘this service’ or ‘that service’ is a supply of “relevant goods”.
  • Only goods purchased exclusively for your main business activity may be considered “relevant goods”.
    Comment: Generally HMRC use the term “main business activity” to describe the business activity or supply that a business most regularly undertakes or makes. It is too early to know how HMRC will apply the term “main business activity” in regards to LCTs but it is likely to be applied strictly to avoid abuse of the rules.
  • Goods that will have some private use are not “relevant goods”.
  • The hire or rent of goods or property is a supply of services.
  • Purchases of assets of any value are excluded from being “relevant goods”.
  • Promotional items to be given away are excluded from being “relevant goods”.
  • The supply of anything electronically or as a download is a supply of services.
  • Wages are not “relevant goods”.
  • Fuel for a car or van is not “relevant goods” unless your main business activity is within the transport industry (ie hauliers, couriers, passenger transport businesses, taxis). If you transport your own goods, such as tools in a van or deliver goods you are selling you are not in the transport industry.
  • Supplies by subcontractor are services.
    Comment: if a subcontractor also supplies goods as part of their supply of services the goods are “relevant goods” as long as they are separately itemised and valued on the supplier’s invoice.

Contact us for more information regarding VAT, tax fee protection schemes and how we can help you.

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