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A ST J PRICE FCA argues that the VAT flat rate scheme for small businesses will prove to be of little advantage to many of the businesses at which it is aimed.
'SADLY, I THINK the new flat rate scheme for small businesses will indeed fall flat on its face!', I muttered. 'It looks to me as if many users will pay more VAT under it than they would under the normal rules.'
A ST J PRICE FCA argues that the VAT flat rate scheme for small businesses will prove to be of little advantage to many of the businesses at which it is aimed.
'SADLY, I THINK the new flat rate scheme for small businesses will indeed fall flat on its face!', I muttered. 'It looks to me as if many users will pay more VAT under it than they would under the normal rules.'
'Surely that cannot be right', responded the Busy Practitioner. 'Customs would not bring in a scheme for small businesses, which was not beneficial for a lot of them.'
'Well, in writing up the scheme for the new edition of my book on VAT in the Tolley's Tax Essentials series, I put together two examples of how the scheme would work. For a management consultant, an accountant, bookkeeper, architect or lawyer with a turnover of £80,000, the applicable flat rate percentage of 13.5 per cent would produce an overpayment of VAT of £2,190 if VATable expenses were £20,000. The second example for a retailer of food, confectionery, tobacco, newspapers or children's clothing with sales of £100,000 and a flat rate addition of five per cent, would result in an overpayment of £4,256. That assumes that the cost of goods sold was £80,000, and VATable expenses of £7,000. However, not many retailers of those kinds of goods will be using the scheme because, on a gross margin around £20,000, there will be little profit after overheads.
'Even increasing the turnover in the first example to the top limit of £100,000 only reduces the overpayment by about £330.'
'Are you sure your figures are right?' asked the Busy Practitioner.
'I put them to Customs who agreed with them, but asserted that some businesses would pay less under the scheme. Moreover, since the average savings on administrative costs would be £1,000, anyone could cheerfully pay more under the scheme up to that amount without losing out. Both those statements seem to me to be wrong.
'Many years ago, I challenged Customs with examples of how retailers using Retail Scheme G were far more likely to overpay rather than underpay. They denied this. Subsequent tribunal appeals by shopkeepers, who had woken up to the fact that they were paying thousands of pounds a year too much VAT under Scheme G, showed I had been right. Eventually the evidence became so overwhelming that the scheme was withdrawn.
'The supposed saving of £1,000 is nonsense! I surmise it is based on a survey done by a professor at the University of Bath many years ago, which seemed suspect at the time. I see no savings of time for many users. Tax invoices will still have to be produced for business customers, and some private ones may also expect them. A list of purchase invoices will still be required for the annual accounts for the Inland Revenue. Yes, one need not record the input tax incurred but, without that information, it will be impossible to compare the tax calculated by applying the flat rate to one's turnover against the sum due under the ordinary rules.
'Customs may have miscalculated the flat rate for some kinds of business, and an individual business may be able to use a favourable percentage because of the nature of its sales mix, but such cases seem likely to be exceptions. Nasty traps in the scheme include that the flat rate percentage applies to zero rated and exempt sales, and therefore increases sharply the amount of tax owed as compared with the normal rules.'
'You mean that, if I sell goods or services to a customer elsewhere in the European Union, I have to pay the flat rate on the sale?'
'Yes.'
'Have Customs warned people about any of the problems you are quoting?'
'No. Notice 733 says nothing about any of the pitfalls. Instead of concentrating on clear explanations, which would give a trader a realistic basis for deciding whether to use the scheme, Customs seem to have been concerned primarily about possible flaws in the scheme from their point of view. For example, there is detailed comment about how a retailer must calculate turnover and deductions from it which, although in theory relevant, are points applicable to big businesses, not the kind which will use the scheme.
'I found eleven errors or ambiguities in Notice 733. I have had no detailed response on any of these, although this is partly because the person now responsible for the scheme was not originally involved in the scheme's design, and at the time I was asking questions, had little understanding of it.
'I am sad to find myself, yet again, criticising Customs. The department is under great strain, not least due to politicians demanding action in a hurry, such as the introduction of this scheme itself. Nevertheless, when under pressure, the department repeatedly demonstrates its inability to communicate clearly with traders. Notice 733 is a ghastly example of this.'
A St J Price FCA is a VAT consultant in Gloucestershire and author of VAT in the Tolley's Tax Essentials series. He may be contacted on tel: 01285 851888, fax: 01285 851889, e-mail: asjprice@aol.com.
