Reply to: VAT FRS new rate

[Fred Bloggs]

and if you have (for example) a £150K warchest, getting 1% interest, £1500, you have to pay 16.5% of that to HMRC under the FRS scheme, so another £247.50 to pay.

You would be paying them to be on the FRS scheme, and not recovering anything.

Nope. There was a ruling a few years back excluding bank interest from flat rate VAT calculations. You pay corporation tax on it though.

[FarmerPalmer]

You're making the common mistake as looking at the bit that HMRC lets you keep on the FRS as a "reward". It was never intended to be that, it was always supposed to provide an indirect way of recovering of any VAT you've incurred on your expenses. It just so happened that if this surplus amount exceeded the amount of VAT you pay during the year you'd make a bit of profit.

The "surplus" amount that the new percentage gives you is simply not enough for most of us to recover the VAT on our costs so we're effectively having to charge VAT to clients whilst not being able to recover the VAT we pay. Its only £200 on £100k turnover which only allows for £1k in VATable expenses before you start losing out.

Examples with £100k net turnover and £10k in net VATable expenses:

Registered on standard scheme:
VAT charged: £20k
VAT paid: £2k
VAT paid to HMRC: £18k
Gross profit: £90k

Registered on FRS under new percentage:
VAT charged: £20k
VAT paid: £2k (not reclaimable)
VAT paid to HMRC: (16.5% * £120k) = £19.8k
Gross profit: £88.2k

Being on the FRS has made you £1800 worse off, because the amount of VAT you've paid exceeds the amount of VAT recoverable on the FRS.

On the standard scheme you will always recover the VAT you've paid, no more, no less.

and if you have (for example) a £150K warchest, getting 1% interest, £1500, you have to pay 16.5% of that to HMRC under the FRS scheme, so another £247.50 to pay.

You would be paying them to be on the FRS scheme, and not recovering anything.

[Contreras]

I agree with the sentiment that FRS was too often viewed purely as 'free profit' ignoring its intended purpose. However the cynic in me thinks this is more than just unintended collateral damage.

What's the rationale in disallowing specific expenses, other than targeting contractors as a whole?

Could the issue not have been dealt with under existing VAT legislation (for close companies)?

[TheCyclingProgrammer]

Trust me we aren't the culprits here. They are a certain type of company designed to employ a couple of staff and make the most of the employer ni allowance with a vat reclaim add on.

This. Possibly also related the recent case HMRC lost on certain sectors using the 12% rate.

[Lance]

Trust me we aren't the culprits here. They are a certain type of company designed to employ a couple of staff and make the most of the employer ni allowance with a vat reclaim add on.

Correct.

HMRC likes FRS as it encourages people under the threshold to register. It also is easier to investigate as a simple check against bank statements confirms most of the return.
The issue was an agency (or multiple) setting up LTDs for their 'umbrella staff' and using FRS to make a few more beans. One instance had over 200 LTDs with 2 'employees' in each.

[eek]

+1.

How often have we read moans about being "out of pocket" because the client will only reimburse net + VAT ?

That said, it is quite obviously a punitive tax grab targeted specifically at "us".

Trust me we aren't the culprits here. They are a certain type of company designed to employ a couple of staff and make the most of the employer ni allowance with a vat reclaim add on.

[TestMangler]

+1.

How often have we read moans about being "out of pocket" because the client will only reimburse net + VAT ?

That said, it is quite obviously a punitive tax grab targeted specifically at "us".

Who is this 'us' you speak of Batman ?? I'm not one of 'you lot' any more, but I do enjoy watching the average permatractor try to find ways round the tax grabs that come your way courtesy of "the party of small bizniz, innit"

[Contreras]

This

Proper business can deal with it. It's only you lot that can't cause you seem to think the government was giving you some sort of FRS 'bonus'.

+1.

How often have we read moans about being "out of pocket" because the client will only reimburse net + VAT ?

That said, it is quite obviously a punitive tax grab targeted specifically at "us".

[mudskipper]

It's not defined anywhere that I've seen.

Agreed, I spent some time looking for it this morning. VAT accounting period is the assumption, but that may not be correct.

[TheCyclingProgrammer]

Clarity will come forth in the guidance in due course."

[TheFaQQer]

Its defined in the context of VAT here:

https://www.gov.uk/vat-returns/overview

So it *probably* means every VAT quarter. But I'm still not sure it will make a massive difference to most of us in terms of whether you'd make a net loss by staying on the FRS.

The InTouch blog on the topic says "Registered businesses will need to conduct a test every accounting period. The legislation does not say whether they mean the VAT Return accounting period or the business accounting period. The £1,000 however, is an annual limit and so would need to be apportioned to reflect the period considered. Clarity will come forth in the guidance in due course."

[TheCyclingProgrammer]

It's not defined anywhere that I've seen.

Its defined in the context of VAT here:

https://www.gov.uk/vat-returns/overview

So it *probably* means every VAT quarter. But I'm still not sure it will make a massive difference to most of us in terms of whether you'd make a net loss by staying on the FRS.

[TheCyclingProgrammer]

looking forward to the tax avoidance schemers making 100 companies that sell each other 2k of goods in a massive circle until the first company returns them for a full refund just so they can all keep their FRS percentage down

Until the VAT man comes along and says that the transactions for not for business purposes and disallows the whole scheme and you owe loads of VAT to a pissed off VAT man, all so you could avoid having to go onto the standard scheme.

[TheCyclingProgrammer]

looking at it from the other perspective, for a typical IT contractor, do we know what is allowed in terms of goods?

Can't think of much other than stationary and a few other consumable items (printer ink, replacement batteries for devices) so long as these are exclusively for business use.

And if we're all being honest, how many of us have a company owned printer and other stationary that isn't sometimes used for non-business purposes?

[TheFaQQer]

Is it actually defined somewhere what the relevant "accounting period" is? Is it in the draft legislation?

It's not defined anywhere that I've seen.