Contractors: Don’t pay too much flat rate VAT.
Just three weeks ago it was reported that the VAT flat rate scheme guidance was flawed. The ATT had highlighted that HMRC’s practice was costing traders, as they were forced to pay more VAT to HMRC under the flat rate scheme than the law required. HMRC has now responded with a welcome rewrite of VAT Notice 733: Flat rate scheme for small businesses. This notice now reflects comments made by judges in tax tribunal cases that businesses should ‘use ordinary English’ in choosing the flat rate trade category.
HMRC previously insisted that all consultants should chose the category ‘management consultants’ (flat rate: 14%), even if they were consultants in health and safety, employment, or marketing. Now those businesses who do not describe themselves as management consultants are free to choose the category ‘business services not listed elsewhere’ (flat rate:12%). Another area that caused confusion was the advice in para 4.4 of the previous version of VAT Notice 733, that all engineering consultants and designers should choose the category for ‘architect, civil and structural engineer or surveyor’ (flat rate 14.5%). The first tier tribunal cases: SLL Subsea Engineering Ltd (TC4256) and Idess Ltd (TC3638) found that mechanical engineers were not civil engineers, so mechanical engineers could choose the category ‘business services not listed elsewhere’ (flat rate 12%). That advice has been removed from the new version of VAT Notice 733.
The starting point for any business adopting the VAT flat rate scheme for the first time is to refer to the list of categories in the 1995 VAT Regulations, SI1995/2518, Reg 55K, in order to choose its trade category. In areas of doubt (e.g. where there is no specific category for the business description), HMRC offers assistance in the flat rate scheme manual at FRS7200 and FRS7300, which now reflect the recent court cases. It is also reassuring to read that Notice 733 confirms: “HMRC will not change your choice of sector retrospectively as long as your choice was reasonable. It will be sensible to keep a record of why you chose your sector in case you need to show HMRC that your choice was reasonable”.