Flat Rate VAT - VAT on Bank Interest?

[minstrel]

OK - so I phoned the VAT National Advice Service...

After asking the question the guy immediately said that interest received should be excluded from the calculation.

I then asked him if was absolutely sure as my accountant was saying it should be included. He then put me on hold for a few minutes while he consulted with his colleagues and then came back and confirmed that interest received should be excluded.

So I phoned accountant and relayed the advice I'd been given (I've got a call reference to prove it) and they say they have a letter from the HMRC Flat Rate Scheme Policy Committee saying that bank interest should be included in the calculation.

Apparently the letter goes on to say that the current documentation is not clear, so they will be writing to advisors, including the National Advice Service (which is clearly a different part of the organisation) to clarify the policy. This letter is from September 2006.

So, my conclusion is that most people (including the National Advice Service) think that bank interest should be excluded, but it may not be long before the policy is "clarified" by the Policy Committee.

I did consider asking for written confirmation from the National Advice Service, but then suspected that if I did it might go back to the Policy Committee and I would get a different "opinion".

If the National Advice Service say not to include it, then hopefully none of us will get locked up for following their advice. At least for a while...

[max]

Exempt supplies would be included in the calculation, bank interest is "Outside the scopr" of VAT and so is not included.

If the VAT people have said interest is an exempt supply I would speak to them again and ask to speak to another person and get what they have said in writing and then take it further.

Alan

Alan, is this still your understanding, that bank interest not to be included in determining VAT to pay?

I've heard otherwise, people getting investigated and having to resubmit with it included

[BrilloPad]

Alan, is this still your understanding, that bank interest not to be included in determining VAT to pay?

I've heard otherwise, people getting investigated and having to resubmit with it included

How much can the VAT on bank interest amount to? Surely it costs more to investigate than it raises?

[max]

How much can the VAT on bank interest amount to? Surely it costs more to investigate than it raises?

13%(or whatever rate you are on) of the amount of interest.

As the amount of interest goes up, the amount gets larger, and is not related to the amount VAT you actually collect.

[BrilloPad]

13%(or whatever rate you are on) of the amount of interest.

As the amount of interest goes up, the amount gets larger, and is not related to the amount VAT you actually collect.

But how much interest do people actually earn? Savings rates going down now....

But I am sure HMRC would go to the ends of the earth to get an extra 1p......

[eazy]

Flat VAT Guide Notice 733

Extracts from Flat VAT Guide Notice 733

3.3 How do I work out my total income for Test 2?
Leave out any anticipated sales of capital assets but include all of the following:
• the total value of the supplies you worked out in Test 1
• the value of any exempt supplies, such as rent, lottery commission or bank interest on a business account and
• any other income received or receivable by your business. This
includes any non-business income such as that from charitable
or educational activities.

6.2 What must I include in my flat rate turnover?

Your flat rate turnover is all the supplies your business makes, including VAT. This means all of the following:

* the VAT inclusive sales and takings for standard rate, zero rate and reduced rate supplies
* the value of exempt supplies, such as rent or lottery commission. You can find out more about exempt income in Notice 700 The VAT Guide
* supplies of capital expenditure goods, unless they are supplies on which VAT has to be calculated outside the flat rate scheme in accordance with paragraph 15.9 and
* the value of any despatches to other Member States of the EC if you are making intra EC supplies. For details see Notice 725 The Single Market.

Note: As exempt and zero rate supplies are included in flat rate turnover you apply the flat rate percentage to the exempt and zero rate turnover. You may pay more VAT by being on the scheme if these supplies are a larger proportion of your business turnover than the average for your trade sector.

6.3 What income do I exclude from my flat rate turnover?
You exclude from your flat rate turnover:

* private income, for example income from shares
* the proceeds from the sale of goods you own but which have not been used in your business
* any sales of gold that are covered by the VAT Act, Section 55 - see Notice 701/21 Gold
* non-business income and any supplies outside the scope of UK VAT and
* sales of capital expenditure goods on which you have claimed input tax.

VAT Notice 701/39 Lists under exempt supplies

Section 5 Finance
8. The operation of any current, deposit or savings account.

Extract from the HMRC FRS document:

"2. The flat rate scheme is a simplification measure which enables businesses to calculate their net tax due simply by applying a flat rate percentage to their tax inclusive turnover, (the total turnover generated, including all reduced, zero rate and exempt income). The flat rate percentage will depend upon the trade sector into which a business falls for the purposes of the scheme."

Bank interest has a VAT code of "Exempt" and should therefore be included in the value of turnover.

Conclusion
So it is clear that under normal VAT rules no VAT would apply however under FRS exempt supplies must be included so VAT would be due on interest received.

[TheFaQQer]

Surely it costs more to investigate than it raises?

And since when has that bothered HMRC????

[BrilloPad]

And since when has that bothered HMRC????

eeerrr - I was being stupid was't I.

sorry - will try not to bring common sense into HMRC arguments again.

[turbo]

Including interest seems crazy!

That would mean that anyone that's out of work would still be expected to pay x% of any interest earned even though they've not invoiced.

Perhaps this needs to be highlighted, can't be right for VAT to be taken from a business that isn't even invoicing!

[THEPUMA]

Yes I can confirm that under the FRS, VAT does have to be paid on bank interest, unfair as that may seem.

I can also confirm that I've never known it to be picked up in a VAT review, not that that is a reason not to include it of course!