Fixed rate VAT and ECSL explanation, anyone?

paddyrg

Hi all,

Firstly, I've asked my accountant and taken their advice, but don't understand their answer fully, thought I'd see if anyone here could expand a little for me?

I am a director of a limited company which is VAT registered. It generally takes a few, fairly high value contracts a year. These are usually UK based, and accounted under normal VAT rules, quarterly.

Last financial year there was a considerable sale of services to Belgium. This was done under the ECSL system where they paid the net amount as opposed to paying the VAT and reclaiming. So far, so normal.

I asked the accountant about moving the company to the VAT fixed rate scheme (@ say 13% for argument) to reduce paperwork. They said it would not have been wise last year, as I'd have had to pay 13% of the contract value to HMRC, but because of ECSL I'd have lost money on that contract. In numbers, for clarity-

Contract £25k + VAT
In the UK I'd invoice £30k, and pay fixed rate VAT @ 13% making a modest VAT profit.
Because of the ECSL I'd invoice £25k and declare the transaction on my ECSL, the Belgian client would not pay the tax (big company, registered for Belgian VAT). However, I would still be liable for VAT to HMRC to the time of 13% of the £25k figure - a respectable loss.

Somehow this feels like it's wrong, double taxation somehow. Were it not for the ECSL it would all be straightforward (same as for UK transaction), but occasional EU contracts like this would wipe out any marginal benefits to being on fixed rate in a heartbeat.

Am I seeing this wrongly, or is it unfair, or is my accountant wrong? Would love some thoughts and opinions from anyone on FRS doing sales in Europe. Or anyone who had insights into HMRC's thinking.

Cheers

Wywth

paddyrg wrote: »

Hi all,

Firstly, I've asked my accountant and taken their advice, but don't understand their answer fully, thought I'd see if anyone here could expand a little for me?

I am a director of a limited company which is VAT registered. It generally takes a few, fairly high value contracts a year. These are usually UK based, and accounted under normal VAT rules, quarterly.

Last financial year there was a considerable sale of services to Belgium. This was done under the ECSL system where they paid the net amount as opposed to paying the VAT and reclaiming. So far, so normal.

I asked the accountant about moving the company to the VAT fixed rate scheme (@ say 13% for argument) to reduce paperwork. They said it would not have been wise last year, as I'd have had to pay 13% of the contract value to HMRC, but because of ECSL I'd have lost money on that contract. In numbers, for clarity-

Contract £25k + VAT
In the UK I'd invoice £30k, and pay fixed rate VAT @ 13% making a modest VAT profit.
Because of the ECSL I'd invoice £25k and declare the transaction on my ECSL, the Belgian client would not pay the tax (big company, registered for Belgian VAT). However, I would still be liable for VAT to HMRC to the time of 13% of the £25k figure - a respectable loss.

Somehow this feels like it's wrong, double taxation somehow. Were it not for the ECSL it would all be straightforward (same as for UK transaction), but occasional EU contracts like this would wipe out any marginal benefits to being on fixed rate in a heartbeat.

Am I seeing this wrongly, or is it unfair, or is my accountant wrong? Would love some thoughts and opinions from anyone on FRS doing sales in Europe. Or anyone who had insights into HMRC's thinking.

Cheers

I don't know if I fully understand your particular issue, but maybe you are only looking at part of the picture.

If you sell goods or services for £25k (ex vat) then that is what you receive. Hopefully it is priced to earn you a reasonable margin.

If you are VAT registered, you have to add VAT to the invoiced amount, which you are collecting on behalf of HMRC and (under the conventional system) you pass this VAT onto HMRC.
This is known as your output tax.
Also (under the conventional system) you can recover VAT you buy on goods or services used exclusively for the business.
This is known as your input tax

The flat rate VAT scheme is a simplified scheme for small traders. It avoids the need for complicated VAT accounts to be maintained. It is not designed to produce you a profit, but may do so if your input tax would be lower than the typical for your line of business (likewise you could lose out if your input tax is higher than typical)
You still charge customers the normal rate (20% for standard rated supplies), but you only pay HMRC a smaller amount (you suggested 13% would be the appropriate rate for your business). This does not produce you a 7% profitr as that is supposed to offset the input tax you would otherwise claim, but can't.

If you sell goods to other countries, originally you would have been expected to register for VAT in those other countries (assuming sales there were above the vat threshold)
The EU made this simpler and said rather than you needing to register in say France, your French (vat registered) customer could be considered the seller and so he would declare the value of those "imports" (called aquisitions) and pay the appropriate VAT (which he may also be able to reclaim at the same time if exclusively for his business)

As I said, if you choose to operate under the flat rate scheme, then you are charged on total turnover, but at a lower rate than that charged to the customer reflecting the fact that you 'miss out' in certain other circumstances. (Whether that is by you not charging VAT on EU sales, and/or by you being unable to reclaim input tax on your purchases)
It's up to you if you want to operate the simpler flat rate scheme. If you think you will be significantly worse off, I suggest you don't (perhaps include the cost of additional accountancy services to support the full VAT system in your calculation)

The difference between the standard rate of VAT and the rate you pay HMRC under the flat rate scheme (in your example, 20% - 13% = 7%) is not a government subsidy to help small businesses - it's just there to simplify the whole vat system based on what the average typical business would expect to pay HMRC anyway.
Naturally there will be some that win, and some that lose under the flat rate scheme - but the choice to iuse the flat rate scheme is entirely in your hands.
(You might also lose out under the flat rate scheme if you supplied goods or services that were charged at a lower than standard rate of VAT e.g. you might only charge 5%, or even 0%, but still have to pay HMRC 13%)

paddyrg

Cheers Wywth,

Yes, I used the term 'VAT profit' as a shortcut, fully aware the ~7% is to cover the NV supplies, not a subsidy.

Was just wanting to make sure I understood the FRS was based on turnover (Ex-VAT) and so could lead to a financially worse position for EU sales using ECSL as opposed to charging the VAT to the EU company. I'm not being terribly clear...

If I charged a UK company £25k+VAT that's £30k, FRS payment to HMRC would be 13% * £25k = £3,250 to HMRC, and £26,750 lingering in my account (a minor bonus to make up for the 7% as discussed)

If I charged an EU company £25k but no VAT cash component changed hands thanks to ECSL, I'd still be liable to pay HMRC £3250, and have £21,750 lingering in my account.

As such, I should either not use ECSL scheme (is that possible?) and apply UK VAT (which they would need to reclaim), or not use FRS?

Is that right? Sorry if I'm being dense, I'm just seeing a potential £5k difference in my bank depending on how the VAT is managed cross-border, with the client still paying the £25k at the end of the day ...want to make sure I am not missing something obvious!