Changes to VAT Notice 733

HMRC Updates Flat Rate Scheme Notice 733

HMRC has recently updated Flat Rate Scheme Notice 733. The main revisions focus on how to select the correct sector rate under the VAT Flat Rate Scheme.

Previously, paragraph 4.4 was dedicated to “business activities that are the source of common enquiry.” It advised that if you act as a consultant and don’t fit into another specific sector, you should choose “management consultancy” (14%). This applied even if you weren’t a traditional management consultant. It effectively ruled out choosing “any other activity not listed elsewhere” at the lower 12% rate.

Tribunal Disputes and HMRC Guidance

The guidance listed “architect, civil and structural engineers” to include engineering consultants and designers. This became the area of dispute in two First-tier Tribunal cases: IDESS Ltd (TC03638) and SLL Subsea Engineering Ltd (TC04256).

HMRC’s changes to Notice 733 came after the Association of Taxation Technicians (ATT) urged HMRC to revise its guidance, stating it misrepresented court findings.

IDESS Ltd (TC03638)

IDESS Ltd operated in mechanical engineering within the nuclear industry. After reviewing the company’s records, HMRC decided that the business should have been using the 14.5% rate for “architect, civil and structural engineer.” They issued an assessment and penalties.

The Tribunal disagreed. It found the company was not an architect, civil, or structural engineer. It performed maintenance and repair of machinery, not buildings. Therefore, HMRC’s assumption that all engineers should use the 14.5% rate was incorrect and contrary to the law.

SLL Subsea Engineering Ltd (TC04256)

In SLL Subsea Engineering Ltd, the Tribunal also ruled against HMRC. It decided HMRC had been unreasonable in reversing the taxpayer’s choice of flat rate sector. HMRC relied too heavily on its own guidance rather than the legislation itself.

The judgment stated: “Paragraph 4.4 cannot extend the meaning of the 1995 Regulations. The fact that HMRC think that any engineering design or consultancy work falls into their chosen category does not change the ambit of that category at all.”

Key Legal Implications

These two cases highlight an important principle — HMRC guidance and the law are not always identical. Taxpayers may assume they are, but the courts confirmed that guidance cannot override legislation.

Selecting the Correct Flat Rate Sector

When joining the VAT Flat Rate Scheme, start by checking the official list of categories in the 1995 VAT Regulations, SI 1995/2518, Regulation 55K. This list is also linked in Notice 733 (paragraph 4.3). Each description should be interpreted using its ordinary meaning.

Areas of Doubt

If your business does not fit neatly into any category, HMRC provides guidance in the Flat Rate Scheme Manual at FRS7200 and FRS7300. These paragraphs, referenced in section 4.1 of the Notice, now reflect the latest court decisions.

Documenting Your Decision

When choosing your sector rate, record the reasoning behind your choice. If you can demonstrate that your selection was reasonable, HMRC will find it difficult to challenge it retrospectively.

Example Case: Vintage Tea House Ltd (TC03160)

This principle was demonstrated in Vintage Tea House Ltd, where the taxpayer appealed against HMRC’s attempt to backdate an assessment. HMRC had reversed the company’s decision to use the lower rate for “retailing not listed elsewhere” instead of the higher rate for “catering services including restaurants and takeaways.”

Why the Decision Was Reasonable

The business sold teapots, mugs, novelty items, and provided about ten seats for customers to enjoy light refreshments. The Tribunal found the taxpayer’s original choice reasonable. Their lease limited the premises to “the sale of home and garden accessories, with ancillary sale of cakes, sandwiches, pastries, etc.” There was also no ventilation for an oven.

When the Rate Should Have Changed

However, the appeal was only partially successful. The Tribunal ruled the company should have reviewed its sector annually. When the teashop expanded to 28 seats and food sales became the predominant source of turnover, it should have switched to the catering sector rate.