Following recent concerns that their guidance was incorrect, HMRC has now issued an updated version of VAT Notice 733: Flat rate scheme for small businesses. The revised notice now reflects comments made by judges in tax tribunal cases that businesses should ‘use ordinary English’ in choosing the flat rate trade category.
The flat rate scheme is available to small traders with a turnover of under £150,000 per annum and is designed to make reporting easier. The trader adds VAT onto his net sales at the normal rate which is, in most cases, 20%. However, instead of then deducting the VAT paid out to suppliers and paying the balance over to HMRC, he calculates his VAT by applying a “flat rate” to the invoice total including VAT. This flat rate varies and is dependent on the trade engaged in.
The use of the flat rate scheme is optional. Each trader who qualifies can examine his own circumstances and decide whether to use the scheme or continue to calculate his VAT by the normal method. However, many traders find themselves substantially better off by using the scheme.
In their guidance, which was only advisory and not law, HMRC had 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 the guidance confirms that those businesses who do not specifically describe themselves as “management consultants” are free to choose the category ‘business services not listed elsewhere’ (flat rate:12%). This has always been the stance taken by ourselves when helping clients to register for the scheme.
Similarly, the advice in the previous version of VAT Notice 733, was that that all engineering consultants and designers should choose the category ‘architect, civil and structural engineer or surveyor’ (flat rate 14.5%). However, the first tier tribunal has found that mechanical engineers were not civil engineers, so mechanical engineers could choose the category ‘business services not listed elsewhere’ (flat rate 12%). The new version contains amended guidance.
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 regulations, 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, and this guidance has now reflect the recent court cases.
Finally, notice 733 states: “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”. Good advice, for once!