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HMRC makes a U-Turn on VAT on interest under Flat-Rate Scheme Rules

Until last year, businesses operating on the VAT Flat-Rate Scheme (FRS) have had to pay VAT on deposit interest at HMRC’s insistance. However they have now admitted that this was wrong, and deposit interest is not VATable under the FRS rules.

This is good news if you have paid VAT on interest during the four years prior to your current VAT quarter – you can now reclaim your money by simply adjusting your next return (<£10,000 VAT overpaid).

The Flat-Rate Scheme (FRS)

The FRS was introduced in 2002 as a way of simplifying VAT accounting for businesses with Vat exclusive annual turnover of less than £150,000. In basic terms, as an FRS business the VAT you pay is a fixed percentage of your VAT inclusive turnover. Rather than having to calculate the different between VAT charged to customers and that paid on purchases, this scheme can reduce the time needed by businesses for accounting duties. Businesses registering for the FRS within the first year of VAT registration can also receive a 1% reduction in the flat-rate percentage. The percentage you would pay depends on the categorisation of your business.

What to do if you’ve overpaid on interest

If you have overpaid less than £10,000, all you have to do to reclaim your money is amend your next Vat Return.

If you have overpaid between £10,000 and £50,000, then provided the amount is less than 1% of the total value of sales and all other outputs excluding any VAT in the current accounting period, you can carry it forward and adjust it on the next VAT Return. If it is more than 1% you must complete a “VAT652 – Notification of errors in VAT Returns” form.

If you have overpaid more than £50,000 you must complete a VAT 652 form.

If you need help with your VAT return, or would like some advice on the VAT Flat-Rate Scheme, call your McLintocks advisor on 0845 680 7800.