The Chartered Institute of Taxation has warned that HMRC's new measure to crack down on abuse of a VAT simplification scheme may have unwelcome consequences for tax-compliant small businesses.
The VAT Flat Rate Scheme (FRS) is a simplification measure for small businesses which enables them to pay HMRC a fixed rate of VAT, determined by their type of business, rather than keep detailed records of input and output VAT. HMRC estimates that 411,000 businesses use FRS.
The Chartered Institute of Taxation (CIOT) accepts that the Government must tackle abuse of this scheme, but it says changes to the proposed measure are needed to avoid excessive damage to compliant small traders.
Peter Dylewski, chairman of the CIOT's indirect taxes sub-committee, said: "Targeted action against abuse of the FRS … is preferable to such wholesale changes. We are concerned that HMRC has significantly underestimated the collateral impact of these changes, both in terms of the number of businesses affected and the financial impact."
At the 2016 Autumn Statement, the Chancellor announced changes to the FRS which mean that a business defined as a "limited cost trader" during an accounting period will pay a higher 16.5% rate.If the changes go ahead, businesses using or thinking of joining the FRS will need to determine, typically quarterly, whether they are also a limited cost trader. Small firms could be caught out as they fluctuate in and out of the 16.5% rate, warns the CIOT.
The changes are likely to cause administrative problems for FRS users; any business which might fall within the definition of a limited cost trader will need to check its position for each VAT accounting period using a planned online tool on the Government website.
Dylewski said: "The proposed changes add a significant level of complexity on small business owners who will need considerable guidance from HMRC. Many will have to pay for additional accounting advice."
The CIOT has urged HMRC to rethink its view that existing legislation and legal principles cannot tackle the VAT abuse.