Do you think you are paying too much VAT? Are you concerned that your business is being unfairly penalised by a VAT policy which treats all businesses the same regardless of size? Well, that’s a criticism we, as accountants, often hear. Small businesses have been asking for a fundamental reform of the current system for some time, and it now appears their cause has been championed by the Association of Tax Technicians, with the ATT urging HM Revenues & Customs to review its VAT flat rate scheme to guarantee that small business consultants are no longer charged too much VAT.
What has prompted these calls? Well, a number of recent First-Tier Tribunal flat scheme cases found in favour of the taxpayer. Although these decisions are non-binding on HMRC, the ATT has stated that they should never the less prompt the tax authority to reconsider assessments of users of its VAT flat rate scheme.
ATT said that although the scheme may have been originally designed to simplify VAT accounting for small businesses, the fact is not all businesses are covered by the 51 scheme categories offered by HMRC. These categories determine the percentage of gross business income payable as VAT on a quarterly return.
So what exactly is the ATT asking for? Well, its president, Michael Steed has said Michael Steed:
“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 believes some small business consultants use what’s often referred to as a ‘sweep-up category’ for any business which is not list in HMRC’s 51 category scheme. The advantage of that is that this particular category only attracts a 12 per cent rate of tax. However, the problem is that HMRC’s current guidance often results in different and contested interpretations of the category criteria being applied; criteria which attracts higher rates of VAT.
Commenting on this particular issue, 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.’
The implication of that directive, according to the ATT, is that HMRC therefore expects consultants in the health and safety, advertising and employment law sectors to label themselves as “management consultants”. Unfortunately, the VAT rate for management consultants is 14 per cent, so businesses end up paying more.
The ATT also pointed out another issue relating to other disputed professions. HMRC’s guidance suggests that mechanical engineers should select the ‘architect, civil, and structural engineer or surveyor’ category, which attracts a 14.5 VAT rate: however, 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’.
Commenting on this particular anomaly, Mr Warren added:
“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. 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.”
If you are confused by the complicated and confusing rules surrounding VAT, or suspect that your small business may be unnecessarily paying over the odds, then why not consult the experts? Call Steven Glicher accountants on 0161 485 8007 or email firstname.lastname@example.org for further advice and information.