The Fizz! Blog

The problem with the VAT Flat Rate Scheme

When the Flat Rate Scheme (FRS) for VAT was introduced, it was intended to make completing accurate VAT returns easier for small businesses.  Rather than a) adding up all the VAT that they'd received from customers, b) adding up all the VAT that they'd paid out to suppliers and then c) paying over the difference to HMRC, they could just add up their gross income from customers and then pay over a fixed percentage of that income to HMRC, the percentage being dependent upon their industry sector.

The idea is that the percentages for each business sector should pretty much reflect how small businesses in those sectors typically operate.  In industries (say management consulting) where businesses have minimal VATable costs, their VAT payments tend to be quite high, and so the FRS gives them a high percentage.  In businesses with greater VATable costs (say a shop), VAT payments tend to be low, and so the FRS gives them a lower percentage.

That sounds fair enough in theory, but in practice there's only one real reason why some businesses sign up to the scheme, and that's to pay over less VAT to HMRC each quarter.  There's a big problem with the table of percentages, which is that it's really poorly put together.  It's pretty likely that there will be two categories which seem appropriate, and very likely that there are none.  It's often the case that sloppy drafting means that a rate that's plainly intended for one type of business can be used by another.  Plus, since many pretty common types of business are omitted entirely, they can choose the "Other" category where that really gives a lower percentage than is really appropriate for their business model.

No blame should be attached to businesses that go for as low a percentage as is realistic, of course - they'd be mad not to.  This thread shows an accountant who's been able to claim (somewhat implausibly, to my mind) that he's not really an accountant, and he appears to have persuaded HMRC to agree.  The problem lies with the conception and execution of the scheme itself.  Keeping accurate records under the traditional system is no big deal - you've got to track your costs in the end, in order to get your year-end accounts done - and, apart from anything else, to know how much money you're making.  So the scheme wasn't really needed.  But what makes it worse is that hopeless table of rates.

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VAT Flat Rate Scheme and bank interest

Counter-intuitively and controversially, since the introduction of the VAT Flat Rate Scheme (FRS), HMRC had insisted that any bank interest earned by a business must be included as part of its income.  Therefore, a business registered under the FRS effectively had to pay over VAT on its bank interest, even though bank interest is not generally VATable.

Following a recent case, they've changed their guidance.  They now accept that interest doesn't have to be included in the income of a business when working out its FRS liability.

We've yet to see any guidance from HMRC on whether previously declared VAT on interest can now be recovered.  It's unlikely that any business is massively out of pocket - especially with interest rates so low right now - but it might be worth considering a reclaim if you have been affected.

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Fuel-only mileage rates change

Taxman-approved fuel-only mileage rates changed on 1 December.  These are the rates that HMRC are happy for employers to use a) to reimburse staff for fuel used for company business that they've paid for and put in company cars, or b) reclaim from staff the cost of company fuel they've used for their own private motoring.  But they're also the rates that businesses can use to reclaim VAT on some of the mileage allowances paid to employees and directors.

Employers can pay a mileage allowance of up to 40p a mile, tax-free, when employees use their own car for business.  That hasn't changed, it remains 40p.

You can’t reclaim VAT on all of the 40p, but you can reclaim VAT on the part that represents fuel, as long as you retain VAT receipts covering the cost.  As fuel costs have increased so sharply, the approved rates - the part of the 40p that the taxman is happy to accept as representing the cost of fuel - have just been increased once more.  The new list of rates is here:

http://www.hmrc.gov.uk/cars/advisory_fuel_current.htm

The new rates are to be applied from 1 December.  If you're VAT registered, not on the flat-rate scheme, and failing to reclaim VAT on your mileage costs at all, you should start.  You can even reclaim some of the VAT you've missed out on in the past - get in touch with us to find out how.

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Software - is it "goods" or "services"?

This was the question asked at a recent VAT tribunal, and I think I'd have got it wrong.

When you register for VAT, you can reclaim VAT on services you've purchased in the six months before registration and goods you've purchased in the three years before registration.  Usually it's clear whether something is a service (like legal work) or goods (like a van).  But if there's any debate, and you bought the thing more than six months ago but less than three years, you'd obviously like it to be classified as goods so you can get the VAT back.

So, that was what the company involved in the case did.  They claimed the VAT back on some software because it was a physical thing on a CD, in a box, with a manual.  I think that's what my instinct would have been too.  But the tribunal disagreed.  Despite the physical existence of the thing, the tribunal decided that the software was a service, not a good.  Worth bearing in mind if a business is yet to register for VAT but is contemplating serious spend on software.

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Requests to delay payment of VAT will still very probably be accepted

It's not a very interesting title for a blog article, is it?  Which is probably why the press has been describing some new statistics on "Time to Pay" arrangements a bit differently over the last few days.

For the last couple of years HMRC have offered a "Business Payment Support Service" - enabling businesses to agree payment plans for tax bills that they can't afford to pay in one go - commonly referred to as "Time to Pay" arrangements.  There have been a few stories in the papers and trade press over the last few days - like this one in Taxation - about HMRC turning down twice as many requests now as they were rejecting at the end of last year.

That's one way of looking at it.  But, if you actually examine the numbers, there's another way of interpreting it:

Businesses seeking time to pay on VAT bills are twice as likely to have their application rejected as they were last year, according to a leading independent finance provider.

Figures obtained by the company Syscap under the Freedom of Information Act show that the number of refusals by HMRC of requests to delay VAT payments more than doubled to 11.2% in the first quarter of 2010, compared with 5.3% in the same period of 2009.

So, in other words, in Q4 of 2009 94.7% of requests to delay payment were accepted - nearly all of them - and in Q1 of 2010 88.8% of requests to delay payment were accepted - nearly all of them.  I'd suggest that the title of this blog is just as valid as the (also accurate) description of refusals doubling.

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Some business now need to pay their VAT a little earlier

We've mentioned this before, but it bears repeating.  As of 1 April, HMRC will consider that you've paid your VAT when your cheque clears their bank account, not - as is the case at present - when they receive your cheque.  That means that, if you pay by cheque, you need to make sure you send it a few days before the end of the month - otherwise you run the risk of being deemed to have paid late, which can result in your having to pay a surcharge.

If you want to get round this, you can pay online (which gives you an extra seven days' grace) or by direct debit (ten days' grace).  More information here:

http://www.hmrc.gov.uk/payinghmrc/vat.htm

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VAT rate change - planning opportunities

The VAT rate is going back up to 17.5% on 1 January.  At least, it's scheduled to go back up to 17.5% - there's a school of thought that says it might be raised higher, as a tax-raising measure.  I can't see it myself, I don't think another tax hike affecting poor and rich alike will go down well in an election year.  We'll have to wait and see.

In any case, there are some opportunites for a bit of VAT planning around the rate change.  If you're selling to VAT registered businesses, they won't be fussed if you charge them 15% or 17.5% as they can reclaim the VAT anyway.  But if you're dealing with customers who *can't* reclaim the VAT - like private individuals or many charities - then it might well be desirable to charge them 15%, not 17.5% - either because you'll lower your price to them, or you'll keep the gross price the same but be able to give less to the taxman and keep more yourself.

If so, then in most cases, if your customer agrees, you can invoice them in December, not January, fixing the VAT rate on the invoice at 15%.  There are some specific rules to prevent "abusive" early invoicing - in particular, on sales of more than £100,000 - but for many small businesses it's very workable.  Give us a call or email if you'd like to discuss it.

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One supply or two?

A common theme of VAT cases is attempts by businesses to claim that they are selling two separate things when they're actually only selling one.  The reason that you'd try and do this is that some things have VAT on them - meaning that if you sell them you have to give some money to the taxman - but some things aren't - meaning that you can keep all of the money.

Though sometimes a claim will succeeds, often they're audacious or just silly.  The benchmark for some time has been Sky TV's claim that their subscribers were buying a) satellite TV and b) a monthly magazine.  If they'd succeeded in that claim, they would have been able to cut their VAT payments, as there's no VAT on magazines.  Of course, they didn't succeed, as it was a ridiculous claim, and every level of tribunal and appeal quite rightly found that the prospect of a magazine didn't enter into a customer's mind when they signed up - it was very much incidental to the main supply of TV channels.

But, following a VAT tribunal case in the summer, Sky have lost the crown for the most ridiculous claim, which now belongs to Purple Parking.  They're one of the companies that provide parking near airports, and then drive you from the car park to the terminal.  Their - undeniably imaginative - claim was that their customers are purchasing two things - a) car parking and b) a ride in a bus.  When the tribunal had stopped laughing, they told Purple Parking that their customers were plainly buying parking - the clue is kind of in the name Purple Parking - and that the bus ride part is incidental to that.  Sometimes you do wonder how much thought goes into making these claims, particularly bearing in mind the hefty professional fees that must be involved.  Although you often have to applaud creative attempts to minimise tax burdens, this isn't one of those cases!

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Are Pringles crisps?

This is a question of vital importance to HM Revenue & Customs, and it has been rumbling through the courts for some years.  But it's now all over, and the verdict is...

Yes, Pringles are crisps.  This is bad news for Mr Pringle, but good news for the VATman, because it means that Mr Pringle needs to hand over some VAT every time he sells a tube of his delicious snack.

The central question in the dispute has been whether Pringles (which are around 42% potato, 33% fat and 25% other stuff) are "made of" potato.  For obscure reasons I won't go into, VAT rules mean that if they're "made of" potato then VAT is due on their sale but if they're not "made of" potato then it isn't.  Ironically, given that he's probably generally reluctant to boast about the small quantity of potato in his potato-based snack, Mr Pringle had taken the position that there is so little potato in his products that you couldn't really say they're made of potato.  On the other side, the VATman has been saying that the man on the Clapham omnibus would consider Pringles to be made of potato, regardless of the precise quantity of potato contained within.

To cut a very, very long story short the judges agreed with the VATman - that common sense says that Pringles are made of potato.  Their position can be summarised in this excellent passage from the judgement:

VAT legislation uses everyday English words, which ought to be interpreted in a sensible way according to their ordinary and natural meaning. The "made from" question would probably be answered in a more relevant and sensible way by a child consumer of crisps than by a food scientist or a culinary pedant. On another aspect of party food I think that most children, if asked whether jellies with raspberries in them were "made from" jelly, would have the good sense to say "Yes", despite the raspberries.

Although I'm not sure what the child would say if presented with a pudding that was 42% jelly, 33% fat and 25% other stuff.  I guess that's trifle, thinking about it, so they'd probably be quite happy.

Incidentally, while this case might seem trivial, the amounts of VAT that were at stake were certainly not trivial at all - in the first instance the cost to Mr Pringle of this verdict is £100m, with a further £20m a year cost from now on!

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Entertaining overseas clients

A verdict in the European Court of Justice has given UK businesses the opportunity to reclaim VAT on the costs of entertaining overseas customers.

A long time ago, businesses were allowed to reclaim VAT when they incurred costs entertaining overseas customers, but not when they entertained UK customers.  Then Customs changed their approach and blocked the recovery of VAT on all entertaining of customers.

However, in the cases of Danfoss and AstraZeneca it has been decided that this change was disproportionate compared to the problem Customs were trying to solve, and that it may be ineffective as a result.  This has opened the door for businesses to claim VAT back on the costs of entertaining overseas customers, and they can go back as far as 1 May 1997 - though a claim going back to then will have to be submitted by the end of this month.  There's detail about what you actually need to do on the HMRC website.

Obviously, this verdict isn't going to be of a great deal of use to most UK businesses - by and large, where businesses do entertain customers they are likely to be from the UK.  But for a few businesses it will be very good news.

Fizz provide a complete range of accounting and taxation services for SMEs, in Oxfordshire, Buckinghamshire and further afield.  Visit us at www.fizzhq.com or call us on 01844 215682.