The Value Added Tax (Amendment) (No. 2) Regulations 2002

Explanatory Note

(This note is not part of the Regulations)

These Regulations, which come into force on 25th April 2002, further amend the Value Added Tax Regulations 1995 (S.I. 1995/2518) (the “principal Regulations”). However, Part I of the Regulations, which amends the annual accounting scheme, has effect in the case of persons who are already operating the annual accounting scheme only from the beginning of their relevant accounting periods starting after 24th April.

Regulation 3 amends the definitions of “the agreed quarterly sum”, “the quarterly sum”, and “the monthly sum” prescribed in regulation 49 of the principal Regulations. The effect of the changes is that the amount of the quarterly sum and the agreed quarterly sum is increased, and new provision is made to define the latter two terms in respect of persons who have not been registered for VAT for 12 months (such persons were formerly not permitted to use annual accounting).

Regulations 4 and 5 amend regulations 50 and 51 respectively, of the principal Regulations. The effect is that persons using annual accounting will make payments of the monthly sum or the agreed monthly sum, unless the Commissioners agree that payment may be made of the quarterly sum or the agreed quarterly sum instead. The rules that formerly allowed some persons using annual accounting to make no interim payments are removed.

Regulation 6 amends the rule in regulation 52 of the principal Regulations that a person must have been registered for VAT for 12 months before he is eligible to apply to use annual accounting. The effect of the amendment is that the rule does not apply where a person has reasonable grounds for believing that the value of taxable supplies made or to be made by him in the period of 12 months following his application will not exceed £100,000.

Part II of these Regulations inserts a new Part VIIA, comprising new regulations 55A to 55V, into the principal Regulations and makes consequential amendments to the principal Regulations. This new Part VIIA of the principal Regulations establishes the flat-rate scheme for small businesses (“FRS”).

The new regulation 55A of the principal Regulations defines terms used within the new Part VIIA.

The new regulation 55B provides that the Commissioners may authorise a taxable person to commence using the FRS, or may refuse to do so for the protection of the revenue. It also prescribes the date of entry, including provision that the Commissioners and a taxable person may agree the date of his entry to the FRS, which date may be earlier or later than the taxable person’s application.

The new regulation 55C defines what are to be considered “relevant purchases” and “relevant supplies” for the purposes of the FRS, including making provision regarding supplies that are made at a time when a person is using the cash accounting scheme established by Part VIII of the principal Regulations.

The new regulation 55D sets out the basic rule of accounting for the FRS which is that, subject to some exceptions, the VAT due from a person operating the FRS for any prescribed accounting period is the appropriate percentage of his relevant turnover for that period.

The new regulation 55E allows a person using the FRS to recover input tax incurred on the purchase of a capital item that exceeds a value of £2,000 (including VAT), that he would otherwise not be entitled to deduct by virtue of section 26B(5) of the Value Added Tax Act 1994 c. 23 (“the Act”). The new regulation 55E also permits the whole of this input tax to be treated as if used exclusively in making taxable supplies. It also provides that section 26B(5) of the Act shall not deny the right to recover VAT on any supply, acquisition or importation which is not a relevant purchase. However, it does not create an entitlement to credit for input tax where this is otherwise blocked under section 25(7) of the Act.

The new regulation 55F allows a person whose first prescribed accounting period is also the first for which he operates the FRS to recover the whole of the input tax validly claimed under regulation 111 of the principal Regulations in respect of VAT on goods or services to him before registration.

The new regulation 55G permits the Commissioners to prescribe in a notice three methods (one of which a person operating the FRS must use) for determining when supplies take place for the purposes of ascertaining a person’s relevant turnover. It also allows the Commissioners to set rules in a notice that are to apply when a person changes from one method to another.

The new regulation 55H sets out the basic rules under which a person operating the FRS must determine, based on the category of business that he is going to carry on, which appropriate percentage from those listed in the Table he must apply for a particular period. The determination is made at the beginning of the period in question.

The new regulation 55J provides for an exception to the general rule set out in regulation 55H where a person operating the FRS either begins or ceases to carry on a business activity. It provides that he must determine the appropriate percentage to be applied from the date of the change.

The new regulation 55K contains the Table setting out what appropriate percentage is to apply to a person operating the FRS, depending on what category of business he carries on. It also sets out rules for determining what category of business a person is to be regarded as carrying on where he carries on business in more than one category.

The new regulation 55L sets out the turnover limits for eligibility to join the FRS and which supplies are to be counted when determining the turnover for this purpose. It also sets out other conditions that must be met in order for a person to be eligible to join the FRS. The new regulation 55M sets out the circumstances in which persons operating the FRS cease to be eligible to continue to do so.

The new regulation 55N provides that various matters regarding the appropriate percentage to be applied and matters affecting eligibility to continue to operate the FRS must be notified to the Commissioners in writing.

The new regulation 55P permits the Commissioners to terminate a person’s authorisation to operate the FRS in order to protect the revenue or where a false declaration is made at the time of application.

The new regulation 55Q prescribes the dates from which a person ceases to be authorised to operate the scheme where any of the matters listed in regulation 55M occur.

The new regulation 55R provides that a self-supply charge shall arise where a person ceases to operate the FRS, but remains registered for the purposes of VAT and has claimed input tax on the purchase of capital expenditure that he has not supplied whilst he was using the FRS.

The new regulation 55S provides for an input tax adjustment to be made in respect of stock on hand when persons cease operating the FRS but remain registered for the purposes of VAT. The regulation provides that the amount of the adjustment is to be determined in accordance with a notice published by the Commissioners.

The new regulation 55T allows the Commissioners to vary the terms of any method for determining relevant turnover or the amount of the stock adjustment, by publishing a new notice or by amending an existing one.

The new regulation 55U provides that there is no requirement to raise a reverse charge to account for VAT on supplies from abroad where this is a relevant supply or purchase.

The new regulation 55V provides that, provided the conditions of the regulation are met, a person using the cash turnover method of determining his relevant turnover may recover VAT on bad debts, and sets out the method of calculation.

Regulation 8 inserts a new regulation 57A into the principal Regulations, which provides that a person may not use the cash accounting scheme for any relevant supplies or purchases within the scope of the FRS.

Regulation 9 amends Part IX of the principal Regulations such that a person using a retail scheme must cease to do so if he starts to operate the FRS.

A Regulatory Impact Assessment on the Introduction of a Flat-Rate Scheme and Changes to the Annual Accounting Scheme was published on 25th April 2002 and is available at www.hmce.gov.uk.