Changing flat rate category

[Witchwood]

I have been on flat rate for a few years now, led by my accountant we went under manufacturing. I recently had a look at all the categories, and although we make our products, we also sell them both wholesale and retail. Retail is 70% wholesale 30%. If I was to change my flat rate category to retailing, it is 1.5% less and would save me over 2500 this year. Can you move categories? Would it trigger any sort of investigation etc? Any advice gratefully received

 

[UK Contractor Accountant]

You can move categories if you feel that another industry sector more closely relates to your trade.

What do you have manufacture?

 

[Witchwood]

You can move categories if you feel that another industry sector more closely relates to your trade.

What do you have manufacture?

We make skincare/soaps products and sell online/markets and wholesale. However the retail part is more than the wholesale and probably wont change. Currently on Manufacturing not listed elsewhere at 9.5% Looking at changing to Retailing pharmaceuticals, medicine toiletries and cosmetics at 8%

 

[UK Contractor Accountant]

4.2 If you’ve chosen the wrong sector​

If you have made a mistake choosing an incorrect sector you may pay too much or too little tax. Paying too little could mean that you’re faced with an unexpected VAT bill at a later date.

HMRC will not change your choice of sector at a later date as long as your choice was reasonable. It is sensible to keep a record of why you chose your sector in case you need to show HMRC that your choice was reasonable.

Some business activities can reasonably fit into more than one sector. Changing your sector does not automatically make your original choice unreasonable.

Once, the mistake has been highlighted, going forward you must use the correct percentage.

 

[Bobbo]

We make skincare/soaps products and sell online/markets and wholesale. However the retail part is more than the wholesale and probably wont change. Currently on Manufacturing not listed elsewhere at 9.5% Looking at changing to Retailing pharmaceuticals, medicine toiletries and cosmetics at 8%

I don't think the retail / wholesale split is relevant.

You make the goods, you are a manufacturer. For changing from manufacturing to retailing to be "reasonable", I think your business model would need to predominantly change from manufacturing goods to buying in finished goods to sell.

 

[Witchwood]

4.2 If you’ve chosen the wrong sector​

If you have made a mistake choosing an incorrect sector you may pay too much or too little tax. Paying too little could mean that you’re faced with an unexpected VAT bill at a later date.

HMRC will not change your choice of sector at a later date as long as your choice was reasonable. It is sensible to keep a record of why you chose your sector in case you need to show HMRC that your choice was reasonable.

Some business activities can reasonably fit into more than one sector. Changing your sector does not automatically make your original choice unreasonable.

Once, the mistake has been highlighted, going forward you must use the correct percentage

I don't think the retail / wholesale split is relevant.

You make the goods, you are a manufacturer. For changing from manufacturing to retailing to be "reasonable", I think your business model would need to predominantly change from manufacturing goods to buying in finished goods to sell.

Yes, but it says "If you’re not sure which trade sector to choose, select the one that most closely reflects your main business activity by turnover, not necessarily the time spent."
This means that even if you manufacture, if the bulk of turnover comes from retailing, then the retail rate can be applied - even if you make your own products.

 

[Bobbo]

Yes, but it says "If you’re not sure which trade sector to choose, select the one that most closely reflects your main business activity by turnover, not necessarily the time spent."
This means that even if you manufacture, if the bulk of turnover comes from retailing, then the retail rate can be applied - even if you make your own products.

I can't seem to find where that quoted text originates from, do you have a link?

 

[Witchwood]

I can't seem to find where that quoted text originates from, do you have a link?

Flat Rate Scheme for small businesses (VAT Notice 733)

Find out how to use the Flat Rate Scheme, who can use it and how to apply to join the scheme.

www.gov.uk

It is section 4.3

 

[Bobbo]

It is section 4.3

Thanks, but am I losing my mind? The entirety of section 4.3 says:

"4.3 The trade sectors and flat rates
Information regarding the trade sectors and flat rate percentages can be found in VAT Flat Rate Scheme - Flat rates for types of business. You would use these rates if you’re not a limited cost business (read paragraph 4.4). If you’re a limited cost business you need to use 16.5%."

 

[Witchwood]

Thanks, but am I losing my mind? The entirety of section 4.3 says:

"4.3 The trade sectors and flat rates
Information regarding the trade sectors and flat rate percentages can be found in VAT Flat Rate Scheme - Flat rates for types of business. You would use these rates if you’re not a limited cost business (read paragraph 4.4). If you’re a limited cost business you need to use 16.5%."

Sorry... I am not sure where I got the 2nd part o the info... cant find it now but it was def on some gov doc.
Anyway 4.8 says pretty much the same... "If your business includes supplies in 2 or more sectors, you must apply the percentage appropriate to your main business activity as measured by turnover. If the limited cost business rate applies you must use this rate, read paragraph 4.4. Choose the sector for which your business gets the greater part of its turnover. Do not split your turnover, or apply more than one percentage.

 

[DWS]

Sorry... I am not sure where I got the 2nd part o the info... cant find it now but it was def on some gov doc.
Anyway 4.8 says pretty much the same... "If your business includes supplies in 2 or more sectors, you must apply the percentage appropriate to your main business activity as measured by turnover. If the limited cost business rate applies you must use this rate, read paragraph 4.4. Choose the sector for which your business gets the greater part of its turnover. Do not split your turnover, or apply more than one percentage.

But is that not for when you first choose the FRS percentage?
You have already used the rate that was applicable at the time.
From my understanding you now need to convince HMRC that that rate is incorrect and not reasonable at the time according to the HMRC guidelines, but it does seem that if HMRC take the view that the original application was reasonable then they will not change it at a later date, that’s how I read it.

 

[GLAbusiness]

At first sight if 1.5% equates to £2,500 then that would seem to imply a turnover of some £166,000 which is above the flat rate limit. There may be other factors to take into account


oops, just read the next bit - you can stay on until turnover reaches £230,000

Ignore my rambling

 

[Witchwood]

But is that not for when you first choose the FRS percentage?
You have already used the rate that was applicable at the time.
From my understanding you now need to convince HMRC that that rate is incorrect and not reasonable at the time according to the HMRC guidelines, but it does seem that if HMRC take the view that the original application was reasonable then they will not change it at a later date, that’s how I read it.

At the time of registering the business was going down a more manufacturing pathway... white labelling and wholesale. Things have changed and now we are more retail. Retail sales are now the greater part of my business and that is the continued pathway.

 

[Witchwood]

At first sight if 1.5% equates to £2,500 then that would seem to imply a turnover of some £166,000 which is above the flat rate limit. There may be other factors to take into account

That is only the first year though? And as long as you dont exceed 150k in the first 12 months of registering you can stay in it until 230k? We have been registered since 2020

 

[Witchwood]

At first sight if 1.5% equates to £2,500 then that would seem to imply a turnover of some £166,000 which is above the flat rate limit. There may be other factors to take into account


oops, just read the next bit - you can stay on until turnover reaches £230,000

Ignore my rambling

Ignored! Ignore my response to that too.

 

[DWS]

At the time of registering the business was going down a more manufacturing pathway... white labelling and wholesale. Things have changed and now we are more retail. Retail sales are now the greater part of my business and that is the continued pathway.

I would get in touch with the FRS team then, they will probably want you to write in or email so you can provide the reasons why you believe the rate should change along with supporting evidence.

 

[Witchwood]

I would get in touch with the FRS team then, they will probably want you to write in or email so you can provide the reasons why you believe the rate should change along with supporting evidence.

I think thats what I will do. TBH my accountant led the way on this from the start. Not sure why they put me on manufacturing when all along my main business has been selling soaps and skincare! I might make it, but selling it is where i make the money. I should have been more proactive and looked into it I guess, but I wasn't aware (am still very unaware!) of any thing to do with vat etc and wasn't aware there were different categories or I would have definitely said put me on the retail one. Again that was their job, and should have done it as to be the most efficient for me. That's why I pay them! Not sure that is a valid reason for hmrc though.

 

[DWS]

Not sure that blaming your Accountant is going to be any use as a reason why you are on the wrong percentage!
Ultimately you run and own the business, not sure how it worked between you and your Accountant but with my clients I insist they choose the SIC codes for the Company and they choose the FRS %, you know your business and what it does better than your Accountant so can not see why they should be making the decision.
Have you actually discussed this with your Accountant?

 

[Witchwood]

Not sure that blaming your Accountant is going to be any use as a reason why you are on the wrong percentage!

That's why I pay them! I explained to them I am clueless with all things vat/tax/numbers and pay them to do it for me! It was their decision to put me on manufacturing... I was not told there were any other options etc and therefore assumed it was the right thing to do. I had trust and faith in them to do the best for me. It may be my business, however I out source many things to other professionals...web design, content, photography etc to those who know what they are doing, and working in the best interests of my company, Anyway. I am not 'blaming' anyone. It is just now I have found a better option, and spoke to my accountant who seems to think it will be easy to swap sectors without too much question.

 

[DWS]

Glad you got it sorted, but with no disrespect you just moaned about your Accountants giving wrong advice but are now happy for them to sort it out ‘without too much question’
But then I suppose that’s why you pay them!

 

[Witchwood]

Glad you got it sorted, but with no disrespect you just moaned about your Accountants giving wrong advice but are now happy for them to sort it out ‘without too much question’
But then I suppose that’s why you pay them!

Yes. I did moan a bit, and maybe the advice was 'wrong' in the beginning. Although it was still a fair assumption to put me under that sector too. Many business have multiple channels and I guess finding the correct sector is key. The 'without too much question' was a reference to hmrc... my accountants seem to think that changing sector should not be too much of an issue with hmrc, as both sectors are correct, and as my business has evolved and changed, the retail sector may now be more suitable. I would imagine that many small business on flat rate find themselves more suited to a different sector as their business grow/change?

 

[MyAccountantOnline]

..... Would it trigger any sort of investigation etc? Any advice gratefully received

In my experience unlikely for the amounts you mention.

 

[Witchwood]

But is that not for when you first choose the FRS percentage?
You have already used the rate that was applicable at the time.
From my understanding you now need to convince HMRC that that rate is incorrect and not reasonable at the time according to the HMRC guidelines, but it does seem that if HMRC take the view that the original application was reasonable then they will not change it at a later date, that’s how I read it.

I think this may be relevant to me too... I think many small business change. For example the florist down the road has closed her shop and only sells on one market but mainly does weddings/funerals and corporate now. So she is doing the same activities, just more of one of them.
"If the balance changes but you continue to do all the same activities, carry on using the percentage that was appropriate at the start of the year until the anniversary of you joining the scheme. Review the balance between the parts of the business each year. Make this review for the first day of the VAT period in which the anniversary of you joining the scheme falls. If on that date the balance has changed, or you expect it to change over the year ahead, switch to the trade sector for the larger portion of your expected business.

This may also mean that your flat rate changes. If this occurs use the new flat rate from the start of the VAT period in which your anniversary falls, not just from the anniversary to the end of the period."

 

[MyAccountantOnline]

I think this may be relevant to me too... I think many small business change. For example the florist down the road has closed her shop and only sells on one market but mainly does weddings/funerals and corporate now. So she is doing the same activities, just more of one of them.
"If the balance changes but you continue to do all the same activities, carry on using the percentage that was appropriate at the start of the year until the anniversary of you joining the scheme. Review the balance between the parts of the business each year. Make this review for the first day of the VAT period in which the anniversary of you joining the scheme falls. If on that date the balance has changed, or you expect it to change over the year ahead, switch to the trade sector for the larger portion of your expected business.

This may also mean that your flat rate changes. If this occurs use the new flat rate from the start of the VAT period in which your anniversary falls, not just from the anniversary to the end of the period."

You shouldn't wait to make any changes. If the nature of your business changes assuming you are still eligible to use the Flat Rate scheme you choose the flat rate percentage which is appropriate from the date of the change and notify HMRC within 30 days.

 

[Witchwood]

You shouldn't wait to make any changes. If the nature of your business changes assuming you are still eligible to use the Flat Rate scheme you choose the flat rate percentage which is appropriate from the date of the change and notify HMRC within 30 days.

I took that directly off hmrc vat notices...

 

[MyAccountantOnline]

I took that directly off hmrc vat notices...

4.10 If you start or stop a business activity during the year​

If you stop a business activity or start a new one during the year, you’ll need to check if the Flat Rate Scheme is still the better way to calculate your VAT. The change may mean you’re no longer eligible to use the scheme — read paragraph 12.2.

If you’re still eligible to use the scheme, consider which business activity forms the larger part of your expected business. Do this in the way described in paragraph 4.8. Apply the appropriate percentage from the date of the change in your business until your next anniversary of joining the scheme, or the next change to your business, whichever comes first.

If you change flat rate percentages you must tell HMRC in writing within 30 days of the change taking place.

(VAT notice 733)

 

[Witchwood]

HMRC guidance​

​

4.11 Changes to the flat rate​

If the flat rate for your trade sector changes, you must use the new rate from the date of the change. The new VAT flat rates are published in advance. You can find the new rates in VAT Flat Rate Scheme. In these circumstances you do not have to tell HMRC that you have started to use a different rate.

I took that to mean that if hmrc change the rate or adjust the % on the sector you are on.

​

 

[MyAccountantOnline]

I took that directly off hmrc vat notices...

Apologies I misread your post - I've just posted a link to the notice in case it helps anyone.