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Reader feedback: the VAT flat rate scheme

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There is a common misunderstanding, writes Tony Greenman (AXA UK).

Dear Sir,

Thanks to Geraint Jones for his interesting article (‘The VAT flat rate scheme’, Tax Journal, 4 May 2018), and I’m pleased he referred to the flat rate scheme (FRS) as a simplification of the normal VAT accounting routine, but my experience is that some users of the scheme and their accountants don’t fully appreciate what the scheme actually does. Unfortunately, this understanding isn’t helped by one part of the HMRC guidance (see bit.ly/1FGCrOK), which states ‘you can’t reclaim VAT on your purchases – except for certain capital assets over £2,000’.

My understanding is that the above statement is (at best) misleading. The FRS is a simplification; it doesn’t mean that users are not entitled to reclaim input tax incurred in connection with their taxable business. The application of a fixed rate to tax-inclusive turnover clearly means that the difference between the applicable fixed rate and the VAT fraction (16.67%) is a built-in allowance for input VAT recovery. This is actually confirmed elsewhere by other HMRC guidance in HMRC’s VAT Flat Rate Scheme Manual at FRS2200. This states: ‘The scheme does not negate a business’ “right to deduct” input tax, as the flat rate percentages have an allowance for input tax built into them. The flat rate scheme simply removes the need to calculate output tax and input tax separately.’

My particular concern is that when dealing with VAT registered policyholders making a claim under their commercial insurance policy, the normal expectation is that since the claim cost, i.e. the repair services or replacement goods, are supplied to and used by such registered persons, so they will incur the VAT element of the cost and recover from HMRC (subject of course to any restriction, e.g. partial exemption). I get frequent enquiries from policyholders and their accountants who say that as the business uses the FRS, they are unable to reclaim the VAT so it should be covered by the insurance policy. My explanation is that if the business did not have insurance, or did not wish to make a claim, then they would simply settle the repair (etc.) invoice directly and the VAT incurred would be treated in exactly the same way as VAT on any other business expense, i.e. the VAT is deductible, via whatever method of accounting the business chooses. The fact that there is an insurance claim is irrelevant to the VAT treatment.

That said, if any other reader has considered the operation of the FRS as regards input VAT on insurance claim costs, then it would be good to see if there is a consensus view. 

Tony Greenman, group head of indirect tax, AXA UK Plc (tony.greenman@axa-uk.co.uk)

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