.png)
.png)
CHRIS TAILBY, director of tax practice at Customs and Excise, explains the rationale behind the new scheme for small businesses.
I THOUGHT IT might be useful to set John Price's Comment entitled 'Design Flaws' in Taxation, 19 September at pages 669 and 670, and Malcolm Gunn's article 'Thanks, But No Thanks?' in the 17 October issue at pages 56 to 59, in the context of the background to the introduction of the scheme.
CHRIS TAILBY, director of tax practice at Customs and Excise, explains the rationale behind the new scheme for small businesses.
I THOUGHT IT might be useful to set John Price's Comment entitled 'Design Flaws' in Taxation, 19 September at pages 669 and 670, and Malcolm Gunn's article 'Thanks, But No Thanks?' in the 17 October issue at pages 56 to 59, in the context of the background to the introduction of the scheme.
Taken overall, both John Price and Malcolm Gunn argued that the VAT flat rate scheme would be of little advantage to small businesses. Let me stress that it is not a scheme for paying less VAT. It is about lowering the cost, to small businesses, of complying with the VAT regulations. The Chancellor said in his Budget speech:
'… I start by removing, for thousands of small businesses, the burdensome requirement - in place since 1973 when VAT was introduced - of having to record the VAT charged on each individual purchase and sale. So, with immediate effect and for a total of 500,000 small businesses with turnover of up to £100,000 a year, I am introducing a new flat rate calculation for VAT payments. Rather than them filling in forms, we will introduce a flat rate calculation and save a typical small business hours of administration a year. I can announce that, from next April, I plan to extend this scheme to include almost half VAT-registered firms: in total 700,000 small firms with turn- overs of up to £150,000 will be able to save time and form-filling by making flat rate VAT payments.'
It is evident from the numbers given above that this scheme, even without the planned extension to £150,000 turnover, has a wide potential catchment. For a variety of reasons, many of these eligible businesses will wish to stay with conventional VAT accounting, but for many there will be tangible benefits to be gained from switching to the flat rate scheme. Some businesses will find that they pay less VAT under the scheme than when using the normal rules. All the businesses on the scheme, however, will gain from no longer having to account in detail for sales and purchases. In the case of purchases, this will also extend to not having to worry anymore about VAT assessments for transposition, duplication or other input tax errors.
The flat rate scheme allows businesses to save the time they would otherwise spend recording individual sales and purchases, thus lowering administrative costs for businesses. This should encourage those businesses that are starting-up, releasing time and money to promote sales necessary for growth. Some will save more time and money, some less, and some will just be relieved that they no longer have to do all the tedious recording work or have the worries associated with detailed record keeping.
The scheme also allows businesses to predict more accurately their payment to Customs. For a business under the normal rules, the exact payment is only finally calculated once the VAT return figures are ready at the end of the period. With the flat rate scheme, where the payment is a percentage of sales, an exact figure could even be calculated at the end of each day. This allows division of the takings between the VAT and the business, thus giving certainty as to money that can be used and that which must be kept to send off with the VAT return.
I am also pleased to say that, notwithstanding the critical tone of both the articles in Taxation, the early indications are that accountants do appear to appreciate the benefits available from the flat rate scheme. As a businesses group, they themselves have the second highest take-up rate among the 56 groups on the flat rate scheme list. One accountant on an accounting website said that her own practice was saving around £1,000 per annum through it. Another told of a client who was saving £1,500 per annum and added that potential losers should stay in the mainstream and potential winners should be biting Customs' hand off.
We provided John Price with replies to the points he made on the flat rate scheme notice but unfortunately his article was published without the updates. We accepted some of his points and not others. However, we are always pleased to receive comments on notices about this or indeed any other schemes. As a result of John's comments, we are updating the notice. Notices can never provide a complete analysis of every possible combination of business circumstances, so if you have a comment on the scheme, please let us know.
Malcolm Gunn said in his article that the scheme does not cover VAT to be accounted for on acquisitions from other European Union Member States. It may be helpful if I clarify this. Under the normal rules, VAT on acquisitions from the European Union is declared in Box 2 of the VAT return. It may be reclaimed in Box 4 of the same or a later return. Output tax on the subsequent sale of the goods is declared in Box 1 of the VAT return according to the tax point rules. These three items also occur in the flat rate scheme. Instead of entering both the Box 1 and Box 4 figures on the return, only a net figure is entered into Box 1, calculated by applying the flat rate percentage to the value of the goods sold. This just leaves payment of the acquisition VAT which is declared in Box 2.
The 'bottom line' for advisers is: take a serious look at the scheme, think beyond the possible tax savings and see whether or not the flat rate scheme can benefit the client. To pick up on Malcolm Gunn's analogy: we may have produced a Cabbage White and not a Red Admiral, but the production of any butterfly from a chrysalis is pretty remarkable - and this one is already demonstrating that it can fly!
Chris Tailby, formerly of PricewaterhouseCoopers, is now Director of Tax Practice at Customs and Excise and has ultimate responsibility for the VAT flat rate scheme for small businesses.
