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Following my article Reversing the charge, which looked at the VAT return implications of the purchase of goods and services from abroad, I received an interesting email from a reader.
With regards to the VAT flat rate scheme (FRS), he reported that the VAT helpline had told him that VAT on the reverse charge would need to be included in box 1 and box 4 in relation to services purchased from abroad although, as my article pointed out, this is not part of the flat rate turnover as highlighted in VAT Notice 733, paragraph 6.4 (therefore no box 1 entry is needed) and no input tax recovery is made in box 4.
Just to confirm, the relevant section of paragraph 6.4 states that ‘if your business... purchases services from outside the UK to which the reverse charge applies, you do not make any adjustment to your flat rate turnover for these supplies’.
The reader told me that when he pointed my findings out to the VAT office, they explained that the web page to which he had been referred did show the correct position and that the public notice was wrong and needed updating.
This web page states – when referring to boxes 1 and 4 of the VAT return – that ‘you need to include any services from abroad that the reverse charge applies to, but don’t include the value of the services in your flate [sic] rate turnover calculations’.
I was aware that there was some confusion on dealing with the reverse charge for FRS users, and the website link above probably explains why this is the case.
This was why I quoted both the direct legislation (Reg 55U) and the HMRC public notice 733, paragraph 6.4 in my article.
I am concerned that practitioners are being told that public notice 733 is wrong; in my opinion, this is definitely not the case because there has been no change in the reverse charge procedures since the FRS was introduced in 2002 and the public notice has been regularly updated to reflect any changes in the workings of the scheme that have emerged.
However, the positive point here is that the adjustments in Box 1 and Box 4 seem to produce the same tax bill for the client as the correct approach of leaving them out (nil effect overall) so we are only dealing with an administrative issue.
Finally, perhaps a general word of warning on HMRC’s website might be worthwhile. I feel that if practitioners rely on a website extract for a ruling to advise a client on an issue, then my advice is that they should print off the relevant extract, date it and file it in the VAT file of the client.
This approach is not only important to show that ‘reasonable care’ has been taken to get the VAT treatment right (an important feature of the new penalty regime), but also to deal with the potential risk of the website information being incorrect.
This situation is very low risk, but errors have been made and corrected in the past and this can be a problem for anyone relying on advice during the interim period.
Neil Warren
Neil has sent Taxation a response to the comment below. He writes:
'In effect, we have a difference of opinion between the public notice and the article on the website, both of which are HMRC interpretations of the accounting approach to adopt - but in terms of tax due, the outcome is the same in that no VAT is payable on services bought from abroad by FRS users.
'This is the key issue. So this means that any VAT visit would not be concerned about the treatment that has been adopted because it is not affecting the amount of tax due on a VAT return.
'I have expressed my views to HMRC's policy team - but in the overall spirit of "simplification" that is the main aim of the FRS, I think the public notice approach is both correct and sensible.
'I will liaise further with HMRC on this issue to hopefully achieve certainty for the taxpayer'
Neil has asked Taxation to post the following response to the above comment from user lynnmercer
The query raised is whether the reverse charging of services bought from abroad (and therefore their inclusion as turnover for VAT purposes) could take a scheme user above the income threshold where he needs to withdraw from the scheme.
I have good news to report here - the legislation (agreed by HMRC) clearly states that this is not the case. To quote from VAT Regulatons 1995/2518 (reg 55U):
'Section 8 of the Act (reverse charge on supplies from abroad) shall not apply to any relevant supply or relevant purchase of a flat-rate trader.'
Reg 55C confirms that a 'relevant purchase' includes 'any supply of goods or services to a flat rate trader.'
As the reverse charge does not apply, there is no issue with the purchase from abroad being included as flat rate turnover and pushing a taxpayer above the scheme limit.
[Original posting April 2010]
I spoke to HMRC VAT Helpline several weeks ago about this and initially they told me that Notice 733 was correct. I directed them to the above webpage, and after consulting with a colleague they changed their mind and said the webpage was correct.
They agreed to look into it further and call me back to confirm which guidance was right but have not yet called. Unfortunately getting through to them is very difficult and their phone system cuts callers off with no option to hold!
Neil's article states that HMRC's guidance on the webpage is wrong but presumably we have to apply this guidance until either it is corrected or, if it is right, HMRC confirm why the rules have changed.
[Update 8 November 2010]
HMRC have now verbally confirmed after checking with their Policy Department that ...
VAT on Reverse Charge services is to be included in Box 1 and Box 4 of the flat rate VAT return.
The value of the reverse charge services are not to be included in box 6 nor 7.
It is unlikely that VAT Inspectors are aware of this as I have spoken with several HMRC advisors, who also referred to their Technicians for second opinions and they all quote Notice 733 as being the official guidance as they were not aware of the web page until I pointed it out.