The Association of Taxation Technicians (ATT) is calling on HMRC to heed the verdicts in a number of tax tribunal cases and review its guidance and current procedures about the VAT flat rate scheme to stop small business consultants being overcharged VAT.
Although the verdicts are First-Tier and therefore non-binding on HMRC1, the ATT believes they should prompt the tax authority to look again at VAT assessments of users of its flat rate scheme. The scheme was designed to simplify VAT accounting for small business owners who are responsible for choosing their own category based on wordings in legislation which then determines the percentage of their gross business income that they will pay as VAT on their quarterly returns.
The problem is that not all business sectors are covered by the 51 scheme categories, including many consultants, who therefore, quite logically and with subsequent backing of the tribunal courts, choose the sweep-up category for ‘other business services not listed elsewhere’ with a 12 per cent rate of tax. However, HMRC has been taking a different view based on the following statement in its published guidance (VAT Notice 733, para 4.4):‘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 percentage for management consultants is a higher rate of 14 per cent, as stated by the law at Regulation 55K of the 1995 VAT Regulations SI1995/2518. The end result is that HMRC expects, for example, health and safety, advertising or employment law consultants to describe themselves as ‘management consultants’ and pay an extra two per cent VAT.
In addition, HMRC expects mechanical engineers to choose the category for ‘architect, civil and structural engineer or surveyor’ (with a rate of 14.5 per cent), even though recent case law has confirmed that a mechanical engineer provides services linked to plant and machinery rather than land and should instead choose the 12 per cent sweep-up rate. This rate is correct because there is no specific category for mechanical engineers.
Neil Warren, of ATT’s VAT sub-group, said:
“Recent courts cases have clearly confirmed that a business owner should use ordinary everyday words in choosing their category. So an advertising consultant would never describe himself as a management consultant and a mechanical engineer would never describe himself as a civil engineer. In continuing to go against the courts views, HMRC’s thought process is flawed.”
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.
Michael Steed, ATT President, said:
“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.”
Notes for editors
- Flat rate scheme cases taken to Tribunal and found in favour of the taxpayer include: Chilly Wizard Ice Cream Co Ltd [VTD19977], Calibre TAS Ltd [VTD20508], Idess Ltd [TC3638], SLL Subsea Engineering Ltd [TC4256], KTD Management Ltd [TC4808).