A few weeks ago the ATT highlighted that small businesses unable to categorise their flat rate scheme from the 51 categories available are being forced to choose from the list, rather than pick the ‘business services not listed elsewhere’ category.
As an example, HMRC advises in its published guidance that consultants should “choose management consultant” if they do not fit into a specific category, explaining that “this sector is not restricted to businesses that fit the traditional idea of management consultancy’.
But ATT warns, as a result of this, that consultants choosing
management consultant will pay 14% VAT rate, higher than the ‘business services not listed elsewhere’, with a flat rate of 12%.
HMRC’s practice is costing businesses, as they are 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 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 paras FRS7200 andFRS7300,
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”.
If you have been using 14% you should consider whether you should change to the lower rate and speak to your accountant. We are advising all our clients who are affected to do this straightaway.
To your success
Noel
Guilford