Interest not in FRS turnover?
Previously. Bank interest is exempt from VAT, so if you weren’t using the FRS you could ignore this income for VAT purposes. But the VATman said that businesses using the FRS had to include it in their FRS turnover and account for VAT on it.
New case. In the recent cases of Thexton Training Limited and Fanfield Limited, the ruling was that where the receipt of bank interest is derived from the taxable activity of a business, such interest is a relevant supply for the purposes of the FRS and should be included in the FRS turnover. Conversely, where the receipt of bank interest is not a direct result of the taxable activity, interest falls outside the scope of VAT and should not be included in the FRS turnover.
Confused? This gives rise to a potentially confusing situation - if you’re an FRS user, you’ll need to determine whether or not to include bank interest in FRS turnover. Even more confusingly, the VATman did not amend his guidance in Notice 733 and still seemed to be insisting that all interest had to be included in the FRS turnover.
Some clarity. However, a nudge from the Chartered Institute of Taxation has led to the relevant paragraph of Notice 733 being amended. Better still, the VATman has recognised that confusion will be caused by the differing treatments of bank interest derived from taxable activities (and bank interest not resulting directly from taxable activities).
Tip. The VATman has decided that, for simplification purposes, if you’re an FRS user you can exclude all bank interest from your FRS turnover. This means you’re in the same position as all other businesses. If you’ve overpaid on this income, you could now make a claim for the overpayment of VAT.
For more information on how the flat rate scheme for businesses operates, visit http://vat.indicator.co.uk (VA 02.02.01).
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