FRS VAT and Bank Interest

[AlanR]

Hi,

It was my understanding that when calculating your VAT returns, interest earned on business accounts was exempt. I am now led to believe that is only true if you are not registered / using the FRS i.e, if on the VAT FRS then all business account interest is to be included within your VAT Return?

Can anybody confirm this please? i have asked my accountant and when all i wanted was a simple yes or no...more baffled than ever!! And that was after asking the question again.

Regards

Alan

[fathippy]

....not being an expert, here is my intuitive view on it : If you run a business with varied products, some being VATable and others not, then you are only charging/paying VAT on the parts that are VATable, and not the ones that are exempt.

On this basis, if you are receiving interest which is VAT exempt alongside a business that is selling a VATable product, then surely the interest is not included in the VAT calculation.

I may be wrong, but that seems correct to me.

[dp0848]

Interest is included in the calculation of turnover when using the VAT FRS.

Interest is not included in the VAT calculation when using the accrual method.

[fathippy]

Can you explain why it is that interest is included under the FRS? Doesnt seem fair. If I sell 100k+VAT of product and earn 10k of interest, I get paid the 17.5k by the customer which I pass on to the VATman, but the bank is not going to give me another 1.75k to do likewise, so effectively I am giving the VATman some of the interest. Is this offsettable against the CT liability? I really dont understand what the reasoning is for this.

[DuaneJackson]

Can you explain why it is that interest is included under the FRS? Doesnt seem fair. If I sell 100k+VAT of product and earn 10k of interest, I get paid the 17.5k by the customer which I pass on to the VATman, but the bank is not going to give me another 1.75k to do likewise, so effectively I am giving the VATman some of the interest. Is this offsettable against the CT liability? I really dont understand what the reasoning is for this.

Because HMRC dictates it. There's rarely any logic behind it.

For FRS, virtually all income is included in the calculation of turnover, except items which are outside of the scope of VAT (which I thought would have included bank interest). HMRC Notice 733.

[fathippy]

Good job interest rates are hurtling towards zero then, so it wont be quite such a contentious issue!

[AlanR]

Hi,

I have just called the VAT Helpline and they have confirmed that interest earned on business accounts is excluded from VAT Returns - good enough for me. I have a Call Reference Number for the call so hopefully that will support me in the event of a VAT investigation.

Alan

[David Griffiths]

To join the flat rate scheme, your taxable turnover (what you pay VAT on) has to be less than £150,000 AND your total business income has to be less than £187,500. The interest is included in the figure for your total business income, but not in taxable turnover.

As ever, if you read the guides - here- (http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageImport_ShowContent&id=HMCE_CL_000345&propertyType=document#P77_6463) all is explained. Section 3 is relevant.

[davebrown]

Hi,

I have just called the VAT Helpline and they have confirmed that interest earned on business accounts is excluded from VAT Returns - good enough for me. I have a Call Reference Number for the call so hopefully that will support me in the event of a VAT investigation.

Alan

Verbal or written rulings from HMRC are only as good as the question that you asked. When you asked the question, did you ask specifically about the FRS? If you didn't, and you are on the FRS, and you are not paying the FRS percentage on the interest, then I think you may have a problem - and your call reference won't help you.

[Jaydee]

An interesting question - and in my opinion the guidance is not overly helpful.

Without doubt, if you are on the FRS, you pay the FRS percentage on all of your supplies, including ones that are zero rated or exempt.

Also, notice 733 does state in section 3.3 that bank interest is to be included - but note that this is to decide whether the trader passes the turnover test to join the scheme.

Then, rather unhelpfully, the notice is silent regarding interest when listing the exempt income that should be included in the return calculations at section 6.2 despite the inclusion of other exempt income streams such as rent.

So, I would say that the answer to the question depends on whether you believe that bank interest is exempt (and so inside FRS VAT) or outside the scope (and so outside FRS VAT).

Group 5 of Schedule 9 VATA covers finance but does not specifically mention interest received. It refers to the supply of "operation of any current, deposit or savings account".

This, however, often leads HMRC to rule that interest received is financial, and so is exempt - which in turn leads them to believe that it should be included in FRS calculations.

However, a further point, is "have you made a supply at all"? I have seen it argued that if a trader is actively managing their bank interest (via an in-house treasury department for instance) - then they have and so exempt is correct. If they are not, then maybe there is a good argument for outside the scope.

Perhaps this is why the OP's accountant could not give a definitive reply!

[dp0848]

Group 5 of Schedule 9 VATA covers finance but does not specifically mention interest received. It refers to the supply of "operation of any current, deposit or savings account".

This, however, often leads HMRC to rule that interest received is financial, and so is exempt - which in turn leads them to believe that it should be included in FRS calculations.

This has always been my understanding of the situation. I've had this view confirmed by two VAT inspectors over the last few years.

[AlanR]

Verbal or written rulings from HMRC are only as good as the question that you asked. When you asked the question, did you ask specifically about the FRS? If you didn't, and you are on the FRS, and you are not paying the FRS percentage on the interest, then I think you may have a problem - and your call reference won't help you.

Dave, I specifically mentioned that i was on the FRS Scheme and asked for clarification as to whether Business Account interest was to be included in VAT Returns. The response was 'I dont think so but let me check with a colleague', about 1 minute later he came back said that no it wasn't.

Dave Griffiths - regarding your link to the online VAT Notice 733, i have already read that on many occasions and took it to mean exactly the same as you, included to determine eligibility to join the FRS.

Jaydee - interesting comments regarding exempt or outside of scope. i have always taken it to be outside of scope but trying to find a definitive answer is proving difficult. However, since i have asked the question of the VAT Man then i am going to continue to believe that it is outside of scope. As for my accountant not being able to give a definitive answer, it is probably because he never seems willing to commit himself.

At the end of the day it isn't a great deal of money but i just don't want to fall foul of HMRC.

Many thanks to those who took the time to respond with their thoughts, much appreciated.

Regards

Alan

[officeangel]

Quite frankly, I've had a question over VAT recently and phoned the VAT office twice and got two completely different answers to the same question.

What I did manage to establish last week though is that on the FRS anything that is outside the scope of VAT is not included in the calculation of the VAT you owe, but should be included in the total of sales and all other outputs.

Now as interest isn't an output or a sale, I'm really not sure where you would record it but VAT is a bit of a black art if you ask me.

[DuaneJackson]

What I did manage to establish last week though is that on the FRS anything that is outside the scope of VAT is not included in the calculation of the VAT you owe, but should be included in the total of sales and all other outputs.

that last bit is news to me. My understanding is that OOS items should be included in your turnover calculations for determining if you are eligible for FRS, but not in the total value of salesd and outputs on the return. That's how KashFlow will handle it if you are ont he FRS.

[officeangel]

... it's apparently how it should be, but that came from the VAT office, so that could be right, wrong or indifferent.

I've calculated my VAT the way that KF works out my VAT ... now you sorted my confusion from last week!! :)