Readers will be well aware of the significant change that was made to the VAT flat rate scheme (FRS) from 1 April when the limited cost trader rate of 16.5% was introduced. See ‘That simple tax’ (2 March 2017) and ‘Flat rate dilemma’ (12 January 2017).
HMRC promised to notify all FRS-registered traders, but my letter (a copy is with the website version of this article) and those of others I have spoken to arrived only on 27 March. It is therefore likely that many of the 400,000 businesses that use the FRS will not yet have appreciated what is happening.
The letter is also not very clear: many small businesses will not immediately grasp that they are likely to be much worse off if the limited cost trader regime applies to them. They should therefore consider whether to leave the scheme – or possibly to deregister altogether if they are trading below the deregistration threshold (less than £83,000 taxable turnover expected in the next 12 months).
HMRC is reluctant to tell taxpayers to take advice, but this is an area where professional information from someone who understands the FRS would almost certainly be beneficial.
Deregistration or leaving
If a registered trader wants to opt out of VAT altogether, it is necessary to submit a VAT7 form. Deregistration can take effect from the date HMRC receives the form or a later one as agreed, but it cannot be backdated. So someone who wanted to deregister from 1 April would need to have submitted the form very soon after receiving the warning letter.
What about remaining registered, but leaving the FRS? There have been plenty of cases in which HMRC and the tribunals have refused to allow people to join the FRS retrospectively, and a few in which they have not been allowed to leave it retrospectively either. I was concerned that a similarly hard line might be unfair if traders have had so little notice of such an important change. I wrote to the policy team responsible for the changes, and I have received a reassuring response.
A business that wants to leave the FRS must notify HMRC, either in writing or by email to firstname.lastname@example.org. It must provide its VAT registration number, the name of the business and the date it is leaving the scheme.
The leaving date is normally the one it notifies, but an earlier date can be agreed. If a business has not already submitted a VAT return under the FRS for a period, HMRC will agree a leaving date at any time in the period, even before the date of notification. It is still necessary to notify, but the business can use standard VAT accounting (in other words, start to recover input tax again) from the date that it has chosen without waiting for a response from HMRC. VAT Notice 733: flat rate scheme for small businesses has been updated to show that HMRC will agree the earlier leaving date.
For example, in June a trader is completing a VAT return for the quarter to 31 May. She realises she is a limited cost trader and no longer wants to use the FRS. She can notify HMRC to say that she left the scheme on 1 April. However, she is notifying HMRC that she left earlier, rather than asking whether she can leave: a general agreement has already been granted. She can then complete the VAT return under the FRS for the first part of the period and under standard VAT accounting for the remainder.
After HMRC has processed the notification, confirmation of the scheme leaving date will be sent to the trader.
A personal example
I prepare VAT returns under the annual accounting scheme, and I am in the middle of a year to 30 November. I do not expect to incur significant input tax until July so, even with the paltry benefit of the limited cost trader rate, I might as well stay in the FRS until then. HMRC has confirmed that I can notify it as late as December 2017 or January 2018 – as long as I have not submitted the return – and confirm that I left the scheme on whatever date in the period suits me. I am relieved that this one aspect appears to take account of the difficulties of genuine businesses dealing with the change.