I spent 6 years working as a VAT Consultant and saw many occasions on which HMRC brought in a new ‘scheme’ only to discover that they had shot themselves in the foot and started to challenge those who had seen the benefit of using the ‘scheme’.

One such ‘scheme’ is the VAT flat rate scheme (FRS) which can prove very beneficial for  businesses small enough to use it and the following is a good example of what can happen.

A mechanical engineer based in Cumbria registered his business for the FRS in 2009 but found that none of the categories on the list supplied by HMRC appeared relevant to his business – from my experience, not an uncommon occurrence. He took advice from his accountant and registered the business under “Any other activity not listed elsewhere”, with a flat rate, at that time, of 12%.

After three years and following a VAT inspection, HMRC ordered that the business should have been registered as  ‘Architect, civil and structural engineer or surveyor’ which, again at that time, was rated at 14.5%.

The action by HMRC meant that nearly £9,000 plus a penalty of 35% was demanded. The penalty was later reduced, on review, to 15%.

Sensibly, in my opinion, HMRC was challenged on the grounds that a mechanical engineer is not a civil or structural engineer.

Expert assistance was sought as a result of which first-tier tribunal ruled in favour of the taxpayer and he walked away with nothing to pay.

This case highlights the necessity to work with a specialist who knows VAT inside out as it was the specialist that pointed out that HMRC’s guidance notes had no backing in law.

There will be many businesses who have been and will be challenged on the FRS classification which they have chosen. My advice to all is not to accept any HMRC ruling without first asking for an opinion from a specialist.

Leave a Reply

Your email address will not be published. Required fields are marked *