HMRC asked to review its flat rate VAT policy

21st April 2016 | News

The Association of Tax Technicians (ATT) has urged HM Revenue and Customs (HMRC) to review its VAT flat rate scheme to guarantee that small business consultants are no longer charged too much VAT.

Following a number of recent First-Tier Tribunal flat scheme cases which found in favour of the taxpayer, the ATT stated that while the verdicts are non-binding towards HMRC, they should prompt the tax authority to reconsider assessments of users of its VAT flat rate scheme.

ATT said that while the scheme was designed to simplify VAT accounting for small businesses, not all businesses are covered by the categories offered by HMRC. At present there are 51 scheme categories, which determine the percentage of gross business income payable as VAT on a quarterly return.

Michael Steed, president, ATT, said: “We feel it is the right time for HMRC to amend its guidance to accept that honest small business owners have adopted the correct category as intended by the legislation and to ensure people are not paying too much tax.

“Furthermore, HMRC must provide clarity and certainty to scheme users that they will not be faced with the threat of receiving unexpected assessments or penalties for back-dated VAT that, according to the letter of the law, should not be due.”

ATT said that some small business consultants use the “sweep-up category” for “other businesses not listed elsewhere,” which attracts a 12 per cent rate of tax. However, HMRC’s current guidance tends to result in different and contested interpretations of the category criteria, which subsequently attract higher rates of VAT.

Neil Warren, member of the VAT Technical Committee, ATT, said: “Recent court cases have clearly confirmed that a business owner should use ordinary everyday words in choosing their category.

“So an advertising consultant would never describe themselves as a management consultant and a mechanical engineer would never describe themselves as a civil engineer. In continuing to go against the [court’s] views, HMRC’s thought process is flawed.”

HMRC guidelines state: “If you act as a consultant and you do not fit into another specific sector, you should choose management consultancy. This sector is not restricted to businesses that fit the traditional idea of management consultancy.”

According to the ATT, HMRC therefore expects consultants in the health and safety, advertising and employment law sectors to label themselves as “management consultants”. The VAT rate for management consultants is 14 per cent.

The ATT also said that although HMRC expects mechanical engineers to select the “architect, civil, and structural engineer or surveyor” category, with a 14.5 VAT rate, recent case law suggests that a mechanical engineer provides services linked to plant and machinery and should therefore select the 12 per cent “sweep-up category”.

“HMRC’s Notice 733 includes the statement that it will not change a choice of sector retrospectively as long as the original choice was reasonable,” added Warren.

“However, HMRC has been issuing retrospective tax assessments on the basis that the initial choice was unreasonable, again with little support from the tribunal courts.”