Tax & admin ยท 19 April 2016

Poor HMRC guidance means contractors risk paying wrong rate of VAT

other business services
Management consultants are liable to pay VAT at 14 per cent of revenue, while providers of other business services pay 12 per cent

Following a spate of tribunal rulings against HMRC, The Association of Taxation Technicians (ATT) has called for the tax authority to update its guidance on the categories that determine which flat-rate of VAT should be paid by sole traders.

Recent court cases have found in favour of the owners of niche consultants who selected the ?other business services? category when registering to pay flat-rate VAT. Consultants in this group are liable to pay sales tax on 12 per cent of gross revenue ? while those described as ?management consultants? have to pay a higher 14 per cent rate.

HMRC has also penalised mechanical engineers who tick the ?other business services? box ? advising them that they need to pay a flat rate of 14.5 per cent and issuing retrospective tax notices to take account of this.

?Recent courts cases have clearly confirmed that a business owner should use ordinary everyday words in choosing their category. In continuing to go against the courts views, HMRC?s thought process is flawed,? said ATT VAT expert Neil Warren.

?We feel it is the right time for HMRC to amend its guidance to accept that honest small business owners have adopted the correct category as intended by the legislation and to ensure people are not paying too much tax.

?Furthermore, HMRC must provide clarity and certainty to scheme users that they will not be faced with the threat of receiving unexpected assessments or penalties for back-dated VAT that, according to the letter of the law, should not be due,? added ATT president Michael Steed.

The current HMRC guidance for selecting a flat rate advises business owners: ?The descriptions of the sectors are not technical and use ordinary English. So if there is a match or a close fit, use that sector.?

The controversy follows hot on the heels of the removal of travel and subsistence expense tax deductions for freelancers working under umbrella companies. The Association of Independent Professionals and the Self Employed (IPSE) warned that the policy ? which came into effect on 6 April 2016 ? could drive 45,000 freelancers out of business.

It is the latest in a spate of grievances levelled against the tax man, recently criticised for not picking up the phone, forcing digital tax on small firms and mistakenly demanding tens of thousands of pounds from suspected tax avoiders.

Have you had enough of freelancing in the UK? Why not check out one of these idyllic co-working spaces in sunnier climes.

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Hannah Wilkinson is a reporter for Business Advice. She studied economics and management at Oxford University and prior to joining Business Advice wrote for Kensington and Chelsea Today about business and economics ? as well as running a tutoring company.

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