21 June 2016
Press ReleasesHM Revenue & Customs, HMRC, has recently updated its guidance for consultants using the VAT Flat Rate Scheme (FRS), following its guidance being successfully challenged at a number of tribunals.
HMRC guidance previously said that all consultants must use the ‘management consultant’ category, charging VAT at 14 per cent. HMRC now recognises that specialist consultants, such as those advising on health and safety, employment or marketing can use the more general ‘not listed elsewhere’ category, charging VAT at just 12 per cent.
At the same time, HMRC has removed guidance that stated that all engineers, including mechanical engineers, should use the ‘architect, civil engineer or surveyor’ category, charging VAT at 14.5 per cent. HRMC now acknowledges that mechanical engineers are not civil engineers and they too can use the more general ‘not listed elsewhere’ category, charging VAT at just 12 per cent.
The VAT flat rate scheme is an alternative way for small businesses to work out how much VAT to pay to HMRC each quarter. Using standard VAT accounting, the VAT you pay to HMRC (or claim back) is the difference between the VAT you charge and the VAT you pay. Under the Flat Rate Scheme you pay VAT as a fixed percentage of your VAT inclusive turnover. The actual percentage you use depends on your type of business.
Meera Rajah, Director and Head of VAT at James Cowper Kreston said: “HMRC has also said that if a business had made a reasonable choice of category they will no longer retrospectively change that category and issue an assessment of under-declared tax, but rather will correct only for the future. It is sensible therefore for businesses to record in writing the reason for their choice of category.”
Meera adds: “If a business thinks it may have used the wrong FRS category, it should rework VAT returns and calculate the tax over-declared for the last four years. If this tax is under £ 10,000, it can correct a current VAT return; but if the over-declaration is more than £ 10,000 it must submit an Error Correction to HMRC.
“I would, however, recommend that even if the tax is less than £ 10,000 an Error Correction is submitted, which eliminates the risk and uncertainty associated with any future HMRC inspection.”
For further information on this guidance or the FRS scheme please contact Meera Rajah, Director and Head of VAT at James Cowper Kreston.
