Getting more from the flat rate VAT scheme

The Taxman extols the virtues of the time and admin savings you can make by using his flat rate scheme (FRS), but he’s keen to play down some of the VAT savings it offers. What are these and when can you take advantage of them?

FRS secrets

We’re sure you’ve heard of the VAT flat rate scheme (FRS), but just to recap on the basics, it allows you to charge your customers VAT at the full rate, but pay a lesser amount to the Taxman. In exchange you have to give up your right to reclaim VAT on some of your purchases. The Taxman’s theory is that this is broadly cost neutral for businesses, but in practice there are several more obscure FRS rules you can use that might save you hundreds, or possibly thousands, of pounds.

Joining the schemesize matters

The FRS is aimed only at small businesses, but because larger ones often start their life as small fry, new companies shouldn’t dismiss using the FRS for a limited period. Where you have a reasonable expectation that your business turnover, excluding VAT, won’t exceed £150,000 for the next year, you can join the FRS. But the rules for leaving the scheme mean that you can stay in it longer than you might think.

Sapphire Tip. You don’t have to leave the FRS as long as your turnover for the previous year doesn’t exceed £230,000 including VAT.

Join early to avoid disappointment

There’s an incentive for joining the FRS as soon as you register for VAT because the rules allow you to keep a larger amount of the VAT you collect from your customers: 1% of your VAT-inclusive turnover to be precise. So, for example, if your first year’s VAT standard-rated turnover in the scheme is £70,000, you’ll save £840 ((£70,000 + 20%) x 1%).

Grouping purchases of capital goods

If you’re familiar with the FRS, you probably know there’s an exception to the basic rule which says you can’t reclaim VAT on purchases. Where you spend £2,000 or more on a capital asset, you can recover the VAT you’ve paid from the Taxman. For example, if you bought a coffee machine for £1,000 you wouldn’t be allowed to reclaim the VAT, but if it cost £2,000 you would. Sapphire Tip. You can group purchases made from the same supplier at the same time. So if you bought tables and chairs costing £1,200 (VAT inclusive) together with the coffee machine, you could reclaim VAT on the lot.

Sapphire Summary

If you use the FRS, you don’t have to leave the scheme unless your annual turnover exceeds £230,000. For most businesses, this will generate a saving (or a “gain”) of 3.5% of turnover. Where you join the FRS at the same time as you register, you’ll cut your VAT bill by 1% for a year.

HMRC loses a key employment status case

A tax tribunal recently considered whether a driver was an employee of the client he worked for. How was it viewed by the tribunal?

The case. EMS (Independent Accident Management Services) Ltd (EMS) was a firm involved in the recovery of damaged motor vehicles on behalf of insurance companies. Mr Makings (M) ran a sole trade business (DKM Services) and was contracted by EMS as a driver. HMRC said that M was an employee of EMS, which ought to deduct PAYE and NI from any payments to him. EMS claimed that M was an independent contractor so he was responsible for any tax and NI due on his income.

Tribunal decision. The tribunal decided that M was self-employed as EMS had no right to control how M carried out his job after having agreed what needed to be done – EMS left M to undertake the job as he saw fit. Financial risk was also considered to be a relevant factor – M had purchased his own van and trailer, had to arrange his own insurance and did not receive holiday pay, sick pay or other benefits such as a pension from EMS. M also had the very real risk that his invoices may not be paid as he invoiced in arrears.

Summary: This case demonstrates that HMRC is trying to argue that a worker is an employee when the facts clearly indicate the opposite. Given the introduction of the Onshore Intermediaries legislation, employment status has become a very important principle and it seems HMRC is trying to shift the definition of a self-employed worker.

Sapphire Tip. If faced with a similar challenge from HMRC, it might be worth reminding it of the outcome in this case. The tribunal ruled that the driver was self-employed as his client had no right to control how he carried out his job and he bore significant financial risk. You can use the facts of this case to back up any challenge to employment status.

VAT Fraud is on the increase – how can you prevent yorself (and HMRC) from being a victim?

The Scam

Not all businesses or suppliers are required to be VAT registered. Any trader whose turnover exceeds £77,000 must register for VAT. Those with lower turnovers do not have to. But it’s been reported that a number of businesses and suppliers, such as tradesman, are charging VAT on their invoices even though they are not VAT registered. In these circumstances most customers will take it at face value that their builder, for example, is genuinely VAT registered and pay the bill in full. The customer ends up paying an additional 20% on their bill which the supplier simply pockets. It’s what the builder would call (adopt a cockney accent) “a nice little earner”.

How to avoid being a victim

Now most businesses operate within the law and it is a minority that are committing this type of fraud. But there is a quick and simple way to avoid becoming a victim of this type of fraud. If a business claims to be charging VAT for the goods or services they provide then:

  • Ask for a VAT receipt or invoice – they have to legally provide you with this if they are charging you VAT. If they can’t then they are breaking the law.
  • Make a note of the VAT number – The invoice should contain details of it.
  • Check that the VAT number is genuine by checking it online – It will take just a few second and will show if the VAT number is genuine and registered to the supplier in question.


What should you do if you suspect VAT fraud?

If you suspect that a firm is avoiding paying VAT, or charging VAT when they aren’t VAT registered, you should report them to the Customs Hotline, telephone 0800 595 000. Don’t worry; you won’t have to provide any personal details so you can remain anonymous.