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Get Your Flat Rate Percentage Right

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The VAT People - Expert Author

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17th January 2014 - Vat People

Case law for the flat rate scheme is gradually evolving and confirms some interesting principles. The choice of flat rate percentage used by a business is in theory quite straight forward. The business should look at the type of activities and select the most appropriate percentage for its sector. However, real life is never that straight forward and the choice of flat rate percentages can also not be as easy as it might seem.

This is particularly the case where the business has income from two or more different activities in which case the business is expected to take a view based on reasonable grounds for the appropriate percentage to use. The problem is that what may seem reasonable grounds for choice of a percentage by a business may not seem quite as reasonable to HMRC. This may then lead to a dispute and an assessment for VAT as is highlighted in the recent case for The Vintage Tea House.

The Vintage Tea House was a business selling teapots, mugs and other items as well as serving tea and other refreshments. The business was VAT registered and applied to use the flat rate scheme in MAY 2008. Although operating a tea shop it opted to use the flat rate for retailing that is not listed anywhere else, rather than using the one for catering services. The flat rate for retail sales was 7.5% whereas the rate for catering was 12.5 %.

The reason that it opted for a percentage appropriate for retailers was that it operated from premises under a lease where catering was ancillary to retail sales of goods. HMRC visited the business and assessed for VAT on the basis that the business should have used the percentage appropriate to catering services on the basis that the turnover from catering varied between 65 to 78% of the total takings.

The tribunal chairman allowed the appeal in part as he felt it was reasonable that in the first year of trade the business would have no information to gauge the level of catering to other sales so that it was reasonable to use a percentage based on the operating lease, that is more retail biased then catering. However, the Tribunal chairman upheld the assessment for later periods on the basis that the business had applied to the local authority for a change in the use of the property from A1 retail to A1 retail and A3 café. The change of use coupled with the fact that the turnover after the first year of trading clearly indicated that catering income was the main source of income meant that the use of the flat rate for retail sales was no longer a reasonable choice for the business.

If you have a client using the flat rate scheme or you are a flat rate scheme user it is worth checking that the percentage that has been applied is the most appropriate one especially if you have income from a variety of different activities. 


About the Author

The VAT People are leading VAT and Customs Duty consultants based in the North West of England. We work with a wide range of businesses throughout the UK as well as assisting our accountancy colleagues to unravel the thorny VAT issues for their clients. We are one of the UK's largest and most comprehensive sources of VAT and Customs advice, our consultancy team having over 140 years of experience in VAT and Customs gained in either HMRC or a Big 4 accountancy practice environment.

Call us on our VAT helpline 0800 077 4604 to discuss. All initial discussions are free with no-obligation.



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Article Published/Sorted/Amended on Scopulus 2014-02-05 09:12:29 in Tax Articles

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