Incorrect Flat-Rate Percentage – Recent VAT Tribunal Decision

Towards the end of 2015, the First-Tier Tribunal heard a case relating to the flat-rate scheme for small businesses after KDT Management Ltd (the Appellant) had been assessed by HMRC for allegedly using an incorrect flat-rate percentage for numerous VAT returns.    

The flat-rate percentage applicable to a business’s turnover is determined by the category of business that the tax payer is expected to carry on in the relevant period. In this instance, at the point of registration the Appellant described itself as a management consultant, however, although initially applying the flat-rate percentage for this business category, when the rate for this category increased, the taxpayer continued to apply the lower percentage as it considered that he was actually acting as a advertising consultant (as this was the type of service that the client was carrying out).  HMRC took the view that the taxpayer was obliged to use the percentage for the trade sector that it had put on the original application form, until such time as an application was made to change that category.  As a result, the tax payer received an assessment for the VAT that would have been due if the percentage for management consultants had been applied less the VAT that had already been declared with reference to the flat rate percentage relating to advertising services.   

The Tribunal deemed that the use of the management consultancy heading was incorrect.  For this reason, the Tribunal ruled that HMRC were unable to insist that the higher flat-rate percentage for management consultants was used despite the fact that this was the business category included on the original scheme application form by the Appellant.  The appeal against the issue of the assessment was therefore allowed. 

This case demonstrates the importance of applying the correct flat-rate percentage. Should you wish to discuss the business category that is appropriate for your business then please do not hesitate to call one of our VAT consultants on our free VAT helpline.

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