Within their domestic reverse charge technical guide, HMRC only briefly mention flat rate scheme treatment for supplies falling under the domestic reverse charge. Section 13 states:
- Flat rate scheme
Reverse charge supplies are not to be accounted for under the scheme. Flat Rate Scheme users who receive reverse charge supplies will have to account for the VAT due to HMRC and recover it simultaneously on the same VAT Return.
Users of the Flat Rate Scheme will have to consider if it’s still beneficial to them bearing in mind that under the scheme they cannot recover VAT incurred on purchases of materials, overheads and so on.
So why are they excluded and how does this work in practice?
The legislation for the domestic reverse charge was inserted into Section 55A VATA1994 (alongside existing MTIC supplies). The legislation for the Flat Rate Scheme in Section 55C(6) VAT Regs 1995 states:
“55C(6) Where a supply of goods or services to which section 55A(6) of the Act applies (customers to account for tax on supplies of goods or services of a kind used in missing trader intra-community fraud) is made to, or made by, a flat rate trader, that supply is neither a relevant purchase nor a relevant supply of his.”
Therefore, supplies made and/or received under the domestic reverse charge are not relevant supplies or purchases and so they should be dealt with outside the scheme.
This does not mean that a trader must leave the scheme, although I will move on to explain why it may be beneficial to do so.
If the client acts only as a sub-contractor and all their sales will now be subject to the domestic reverse charge then it makes sense to leave the scheme, as they will no longer have any output VAT to account for (as these supplies are excluded from the flat rate scheme turnover) but by remaining on the flat rate scheme they continue to be blocked from recovering input tax on materials and overheads, etc.
Building clients who are on the flat rate scheme but make supplies to end users (i.e. their supplies don’t fall within the scope of the domestic reverse charge) are largely unaffected by remaining on the flat rate scheme. They will continue to charge VAT as normal and include the gross value of the supply in their flat rate turnover. If they receive supplies from sub-contractors that are subject to the domestic reverse charge, because these are not relevant purchases, as referred to above, they account for the reverse charge outside of the scheme in Box 1, Box 4 and Box 7 on the VAT return.
As they are not relevant purchases input tax can be claimed in Box 4 in line with normal input tax rules.
Remember, members of our VIP Tax Team service can call our priority advice line for instant help with tax, VAT and employment queries such as this.
To unlock your access to the advice line, plus tax & VAT consultancy support, monthly eCPD modules, in-depth webinars and more, call 0800 231 5199 or book your free My VIP Tax Team consultation now.
Please share this article with your clients
Our team of expert consultants have a wealth of experience and can also provide a written consultancy service to support your practice, like having your very own tax and VAT department.
Why not see what My VIP Tax Team can do for your practice, call 0800 231 5199 or firstname.lastname@example.org to find out more.