The Fizz! Blog

HMRC being reasonable about Flat Rate Scheme categories

The idea of the Flat Rate Scheme for VAT is supposed to be to make record-keeping easier for businesses.  Record-keeping for most professionally-run small businesses isn't that hard anyway, so in reality the big winners from the FRS are those businesses who manage to park themselves in a business category that results in their paying over a smaller amount of the VAT they've collected from customers than HMRC would like.

This is very common, because the list of FRS categories is pretty poorly drawn up, and is full of gaps and ambiguity.  HMRC's answer over the years to this has not been to redraw the list of categories so that it's better, but to put some guidance behind it saying what categories HMRC believe should be used when the nature of a business doesn't fit the list (which in our experience is probably at least 25% of the time).  The thing is, the guidance has absolutely no legal basis at all.  HMRC haven't accepted this, and have tried to enforce back-VAT and penalties against businesses who went on the basis of the list, not the guidance - the classic example being a mechanical engineer, who chose the "other" category since mechanical engineers weren't listed.  HMRC insisted he should have used the "civil engineer" category.  They lost the case, because he explicitly is not a civil engineer, so "other" was accepted by the tribunal as being far more appropriate.

HMRC have now realised that they're losing that battle, and have now accepted that they can't go back and collect more VAT as long as your choice of category is reasonable.  What they haven't said is whether some day they might just amend the list and make it functional!

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Using the wrong HMRC form - the worst-case scenario

In the recent case of X-Wind Power Ltd vs HMRC, X-Wind paid a heavy price for sending the wrong form to HMRC.

The company wanted some new investors to benefit from SEIS - the Seed Enterprise Investment Scheme.  This is an investment incentive that means an investor can get 50% of the amount they've invested in a company back, via a discount on their own tax bill.  For companies and investors that qualify - as was the case here - half-price investment is obviously a great deal.

However, the company made a mistake.  Accompanying a covering letter saying the company was applying for SEIS status, they sent a completed application form for the confusingly similarly-named EIS - the Enterprise Investment Scheme.  That's still an appealing scheme, but it only offers 30% income tax relief, not 50%.  Unfortunately for X-Wind, they filled the forms in accurately and HMRC were happy to accept them.

Nobody noticed this blunder until a new round of investors came on board, and the company attempted to get SEIS clearance for the new investors.  HMRC rebuffed them - one of the rules of SEIS is that the company can't previously have claimed under EIS.  HMRC were insistent that the company had made a successful claim under EIS, albeit totally by accident.  Not only would the first round of investment get only 30% tax relief, not 50%, but so would all subsequent rounds.

You might reasonably think that HMRC should have gone back and revised the previous application, since the company's intent was clear.  In fact, you might think HMRC should just have read the letter properly in the first place, and rejected the EIS form when they originally received it.  We do.  But instead they've stuck to their guns, saying the letter has no statutory weight but the form does.  And HMRC won when the case went to the First-tier Tribunal.

It's unbelievably harsh, and not what we would have expected to happen - despite their reputation, HMRC can actually be pretty reasonable much of the time.  But it does emphasise the importance of using advisers or consultants who are really familiar with the tax relief you're claiming, and taking care that the forms you're completing and the process you're going through is the right one.  The nature of tax means that, if you get it wrong, it might be years before you realise your mistake, and too late to do anything about it.

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Travelling abroad for work?

If you (or a staff member) have to travel abroad for work, then of course your company can reimburse you for the costs of accommodation, food and drink (or pay them directly).  If the company is reimbursing you, then there’s two methods of doing it.

The most obvious method is that you just make an expense claim for the actual costs you’ve incurred, and the company keeps it on record with (ideally) the associated receipts.

But if you’re horrible at keeping receipts, or you’re a cheapskate when you travel, there’s an alternative method.  HMRC has country-by-country (and in many cases city-by-city) benchmark rates, and you can just pay those to the employee instead.  If the employee “profits” from the arrangement, that’s fine, there’s no tax to pay.  Of course, they do have to be incurring actual costs – if they’re staying with a friend they can’t claim the benchmark rates as if they were paying for a hotel!

You can find the rates here (the rates from 1 October 2014 are the relevant ones; they were left in place for the year from 1 October 2015):

https://www.gov.uk/government/publications/scale-rate-expenses-payments-employee-travelling-outside-the-uk

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What does trivial mean?

Fifty quid, that’s the answer, according to HMRC at least.

For an awfully long time, it’s been accepted by HMRC that if an employer provided a “trivial” benefit to an employee or director, the recipient didn’t need to pay tax in return for the privilege.  That’s why you don’t pay tax as a result of your employer providing free tea and coffee in the office.  HMRC accepted that was trivial.

Exactly where the line between trivial and non-trivial stood wasn’t stated, it was just left to everyone’s judgement and common sense.  If someone had asked us if giving an employee something worth £40 was trivial, we’d probably have said no, depending upon context.

But now it’s been made explicit.  Under £50 is trivial, which is higher than anyone reasonably would have expected.  So the answer now if we’re asked if a gift worth £40 to employee is trivial, is – yes, it is, and the employee doesn’t have to pay tax.

This is very helpful.  Lots of employers provide, say, drinks after work from time to time.  Last year, we’d have said that there was a theoretical risk of an enthusiastic tax inspector totting the year’s drinks up and trying to tax each employee on their share.  Not any more (unless you’re handing out some very expensive drinks) – it’s quite safe to put some money behind the bar and not worry about staff getting a tax bill down the line.

There are a few caveats, as you’d expect, but they don’t stop the new interpretation being helpful.  First, a director can only benefit up to a maximum of £300 of trivial benefits a year.  Fair enough.  Second, the trivial benefit can’t be cash, or a gift voucher that can be exchanged for goods (though an “experience” voucher is fine).  Third, it only applies to benefits that are non-contractual, so you can’t promise the benefits to anyone, and if you took everyone to the pub every week, HMRC would be able to argue that it had become implicitly contractual.
But those warnings notwithstanding, this is still pretty helpful news!

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