Any flat rate VAT scheme experts

[iamloading]

I was just wondering if anyone can help as if we are wrong then we are probably going to lose our business.
We registered for the Flat Rate scheme this year and it says your turnover has to be under £150k exclusive of VAT in your first year.
They have now said we have exceeded this and cannot be on the scheme and owe £16k for full rate VAT.
Our turnover for the first year was £158k inclusive of VAT, so once you deduct VAT we are under the threshold.
Our accountant is useless and I'm desperate if anyone can help?

It should be pretty straight-forward…

You don’t deduct VAT, you need to know the exact turnover before VAT was added.

You would need to say what the VAT flat rate for your business is to get anyone to work it out, it might be 4% or it might be 14.5%

Maybe post the exact wording they have used in their letter?

@RandomPerson42 thank you for your response.

So having spent the afternoon on the phone to the accountants (who frankly I want to throttle) and the VAT team it's got more complicated.

So it turns out we are over exclusive of VAT - by £4K. So £154k. Such a small amount and I really feel that they should have warned us. They are saying that it's still ok as when we applied for the scheme we expected our turnover to be £120k based on last year, and are still under £230k so still eligible. The application to join is based on expected turnover and you have to be under £230k by the end of the first full year.

The VAT office say that although they can see that we applied a year ago due to the backlog they never registered us and they won't now was we are over. We've been paying 11% for the last 3 quarters with one more due now. I've asked to speak to someone on the fly rate team but apparently that's not possible.

They said they sent us a letter in November but we never received it.

Can I ask on what basis you thought the Flat Rate Scheme was appropriate?

I used to use it a lot with my clients, but when they brought in the "limited cost trader" rules, it made it pointless for my clients.

@AtomicRitual mainly because our accountant advised it. We are a service business so nothing to offset with VAT and we fit exactly into one of the flat rate categories

In that case I hate to be the bearer of bad news, but as a service organisation you probably should have been paying VAT at a 16.5% flat rate, not 11%.

The 11% only applies if you're not a "limited cost trader".

If you spend less than 2% of the value of your sales on goods (not services) over the period your VAT return relates to, then you can't use your 11% rate and have to use 16.5%.

HMRC brought in the rules because people were using the FRS to pay less in VAT, whereas it was brought in, really, to ease the administrative burden of doing VAT returns where you record VAT on both income and costs.

Rather than just change everyone's percentages to a more appropriate level, they brought in the limited cost trader rules so you have to do a calculation each quarter to determine whether your spending is higher or lower than 2% of sales (hint - it is very unlikely to be, unless you go through LOADS of stationery).

None of our clients had costs of more than 2%, so would have had to apply the 16.5% rate. For comparison, the flat rate scheme calculation method is based on gross sales, so VAT on a £1,200 invoice (£1,000 + 20% VAT) is the equivalent of 16.667%. On a £1,200 invoice you'd have to pay over £198 of VAT, when you'd charged £200 - so a "profit" of £2.

Alternatively if you're on the standard rate of VAT you'd pay over £200, but you'd be able to reclaim VAT on any relevant business expenses. Paying your accountant alone would be sufficient to make it financially beneficial to not be on the Flat Rate Scheme.

I have to say I think you've been very poorly advised if you weren't made aware of the Limited Cost Trader rules.

@AtomicRitual has explained it well. I came to point you here: www.gov.uk/vat-flat-rate-scheme/how-much-you-pay

I think you may have a bill coming unfortunately!

You could try ringing HMRC direct - it's a nightmare to get through at best of times, but at the moment with SelfAssessment deadline looming, it's a long wait. If you do have an unexpected tax bill, HMRC are usually amenable to a time to pay arrangement if requested.

Ps. Change accountants!

Thank you both @AtomicRitual and @PandyT I'm so grateful for you taking the time to reply.
Honestly at this point I could cheerfully kill our accountants. We do spend over 2% which is why they said it was fine, but they didn't say it had to be on goods. For our business we hire lots of venues and pay consultants which takes us comfortably over, but it sounds like that would be defined as service not goods so we wouldn't actually be eligible.
What an absolute nightmare.

All I will say is try not to look at it as if you've lost money - you haven't. Ultimately you'll be paying over what you always should have been. You were poorly advised and suffering at the hands of HMRC's incompetence too. Your accountant had built up your hopes that you'd be profiting from the Flat Rate Scheme in some way.

I should add that HMRC are very, very understanding at the moment, so if your VAT return is showing that you owe significantly more than you expect, you can explain it to them (specifically say that you'd received poor advice) and that you'll need more time to pay. They will likely agree to a payment plan.

If you're not using the Flat Rate Scheme now, you can now claim tax deduction for all the business expenses you've previously not been able to claim for. Make sure, therefore, that you have claimed everything that you're entitled to.

I wouldn't be very happy with HMRC in this case either though. Their own website (Link) says that you can start to use the scheme once they've written to you to tell you your application is successful. It goes on to say that if you haven't heard from HMRC within 30 calendar days of your application, you should contact HMRC to check that it's been received.

I presume your accountant had applied for the FRS separately from your original VAT registration request?

HMRC are an absolute nightmare at the moment. VAT online registrations used to take 24 hours at most, but nowadays they take much longer.

If you have a complex registration you can literally be waiting for 6 months plus.

Things may not be as bad as you think. Presumably you're using VAT registered venues and maybe vat registered contractors, so you'd have at least some input VAT to set against your output VAT if you're removed from the flat rate scheme. Most venues will be VAT registered - you'd need VAT invoices from them. Also other VATable supplies, such as broadband, mobile phone, subscriptions, computers, software, accountancy fees, petrol, etc etc.

Thanks both. Unfortunately none of our contractors or venues are VAT registered hence it being such a killer. There's barely anything significant we can offset.
Thank you all so much for your advice. We've got to have a long hard look at the future of the business I think.