VAT Flat Rate Scheme
HMRC has introduced an additional test from 1 April 2017 that will help determine the VAT flat rate percentage used by VAT registered businesses that use the Flat Rate Scheme. It appears that HMRC considers the benefits obtained by certain businesses to be excessive.
Whilst in theory some businesses win and some lose when adopting this scheme, in practice, a business would only join the scheme if they expected to benefit. However, given you can only apply to use the Flat Rate Scheme if you expect your annual taxable turnover in the next 12 months to be no more than £150,000 excluding VAT, it seems an unusual scheme for HMRC to focus on.
Traders that meet the new definition of a ‘limited cost trader’ are required to use a fixed rate of 16.5%. This includes traders who are already using the Flat Rate Scheme with many at lower rates. The highest rate previously was 14.5%.
A limited cost trader is defined as one whose VAT inclusive expenditure on goods is either:
- less than 2% of their VAT inclusive turnover in a prescribed accounting period;
- greater than 2% of their VAT inclusive turnover but less than £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000).
For some businesses – for example, those who purchase no goods, or who make significant purchases of goods – the outcome of the test will be self-evident. Other businesses will need to complete a simple test, using information they already hold, to work out whether they should use the new 16.5% rate. Businesses using the scheme will be expected to ensure that, for each accounting period, they use the appropriate flat rate percentage. Any business that will be adversely affected by the changes should consider whether it will be more beneficial to leave the scheme.
A recent VAT Tribunal case examined an appeal made by a taxpayer that accounted for VAT using the flat rate scheme. The taxpayer joined the flat rate scheme in 2003 and accounted for VAT using the applicable 13% flat rate until the end of 2008. Following the change in the standard VAT rate, the taxpayer in question received a letter asking taxpayers using the flat rate scheme to check that the correct flat rate was being applied.
The receipt of this letter prompted the taxpayer’s discovery that the applicable flat rate for his business had changed from 13% to 12% in January 2004. The taxpayer submitted a claim for overpaid VAT. HMRC accepted the lower flat rate percentage was correct but only made a repayment for the VAT overdeclared within the usual three year time limits.
The taxpayer appealed on the basis that he had never received any notification of the change in rate detailed in ‘VAT notes – Number 1 2004’. The Tribunal was unable to establish if the VAT notes publication was received by the taxpayer but accepted that HMRC included the document in every VAT return that was mailed to VAT registered businesses.
The Tribunal sympathised with the taxpayer in this case but found that they could not override clear statutory provisions and dismissed the taxpayer’s appeal. This serves as a useful reminder for taxpayers of the importance of keeping abreast of communications from HMRC.