Flat rate scheme
The VAT flat rate scheme for small businesses is supposed to be simple. The trader chooses the trade sector that best fits the majority of their business activities, then applies the flat rate for that sector (from 4% to 14.5%) to their gross sales in order to calculate the VAT to be paid to HMRC. No input VAT is reclaimed, with the exception of VAT charged on the purchase of capital assets (not services) that cost over £2,000.
If you use the flat rate scheme you should review your choice of trade sector every year on the anniversary of joining the flat rate scheme, and switch if the majority of your sales now fall within a different trade sector. HMRC won’t advise you on which trade sector to use when joining the scheme, and say that they will not ask you to change trade sector retrospectively.
So why has HMRC been challenging oil workers in Scotland about their choice of trade sector for the flat rate scheme? Those affected have generally opted for “business services not listed elsewhere” at 12%, rather than “architect, civil and structural engineer or surveyor” at 14.5%. HMRC prefer the latter category as it brings in more VAT. Paragraph 4.4 of VAT Notice 733 says that engineers, consultants and designers should use that trade sector. However, that part of the Notice doesn’t have the force of law – it is for guidance only, and the judge in a recent tax case agreed with the taxpayer that it was wrong.
If you use the flat rate scheme or are about to apply, we can help you decide the most applicable trade sector for your business. HMRC are keen to shoe-horn all sorts of businesses into “management consultancy” at 14%, when possibly “business services not listed elsewhere” at 12% would be more appropriate.