HMRC have responded to recent defeats in the First-tier Tribunal (FTT) about flat rate scheme categories by issuing a revised version of VAT Notice 733 (4 May 2016).
The notice has taken into account the fact that a business should ‘use ordinary English’ in choosing its flat rate category, and confirms that ‘HMRC have offered an interpretation of each sector’ in their guidance (para 4.1) – the previous notice (and view of many officers) indicated that HMRC’s views about where businesses belonged had the force of law. The revised notice also removes the previous para 4.4, which said that consultants should choose the category for ‘management consultants’ even if they did not ‘fit the traditional idea of management consultant’. So HMRC’s previous view was that eg health and safety consultants and employment consultants should pay tax at 14% based on the management consultant rate rather than the 12% rate for ‘business services not listed elsewhere’ ie because there is no specific category for these consultants. The other exclusion in the revised notice (also from para 4.4) is that engineering consultants and designers should always choose the category for ‘architect, civil and structural engineer or surveyor’ at 14.5%. This was the key outcome in the FTT cases of SLL Subsea Engineering Ltd (TC4256) and Idess Ltd (TC3638) where the courts concluded that ‘mechanical engineers’ were not ‘civil engineers’ because the latter work on land related projects whereas a mechanical engineer works on plant and machinery. Mechanical engineers were therefore correct to choose the ‘business services not listed elsewhere’ category at 12% because there is no specific category for their business. A comment made in the SLL case (para 43) was: ‘In our view HMRC erred in looking to their own guidance as being authoritative. They should have looked at the legislation and given it its ordinary meaning.’
The starting point for a business adopting the FRS for the first time, and choosing its category, is to use the list of categories in the 1995 VAT Regulations, SI1995/2518, Reg 55K, which can be found with a direct link from para 4.3 of the revised notice. In areas of doubt (eg where there is no specific category for the business description) HMRC offer assistance in their guidance notes FRS7200 and FRS7300 (a link is given in para 4.1) which now reflect recent court cases. Notice 733 confirms at para 4.2 that:
‘HMRC will not change your choice of sector retrospectively as long as your choice was reasonable. It will be sensible to keep a record of why you chose your sector in case you need to show HMRC that your choice was reasonable.’