Finance Bill 2002: EXPLANATORY NOTE
CLAUSE 23: FLAT RATE SCHEME
SUMMARY
1. Clause 23 introduces a new optional flat rate scheme to simplify the way small businesses account for VAT. Businesses with a taxable turnover of up to £100,000 and total turnover, including the value of exempt supplies and other non-taxable income of up to £125,000 will be eligible to join the scheme. Businesses which join the scheme will not be required to account internally for VAT on all their purchases and sales. Instead, in most cases, they will be able to calculate the net VAT due by simply applying a flat rate percentage to their total turnover for the period. The scheme is being implemented on 25 April 2002.
DETAILS OF THE CLAUSE
2. Subsection (1) amends Part I of the Value Added Tax Act 1994 (the charge to tax). The extent of the amendments are described in paragraphs 5 to 13 below. It inserts new section 26B (Flat rate scheme) before section 27 of that Act (Goods imported for private purposes).
3. Subsection (2) amends Part V of the Value Added Tax Act 1994 (Appeals). The extent of the amendments are described in paragraphs 14 and 15 below.
4. Subsection (3) also amends Part V of the Value Added Tax Act 1994 (Appeals). The extent of the amendments are described in paragraphs 16 and 17 below.
5. New section 26B(1) confers powers to the Commissioners to make regulations under which a person may elect to determine the amount of his liability to VAT by applying the appropriate percentage to his relevant turnover.
6. New section 26B(2) defines terms (such as ?appropriate percentage? and ?relevant turnover?) used in the clause.
7. New section 26B(3) provides that the Commissioners may make regulations to extend the scheme to certain categories of businesses that are entitled regularly to a credit for VAT.
8. New section 26B(4) provides that persons shall be eligible to participate in the scheme to the extent, and subject to conditions and exceptions set out in, or made under, the regulations.
9. New section 26B(5) provides that, subject to exceptions provided for in the regulations, a participant in the scheme is not entitled to recover input tax.
10. New section 26B(6) provides that regulations may provide for the appropriate percentage to be determined by reference to the category of business that a person is expected to carry on; in prescribed circumstances, different percentages to apply to different parts of the same accounting period; and determining the flat rate percentage for a business that carries out more than one category of business.
11. New section 26B(7) provides that certain matters, such as the timing of supplies for the purposes of relevant turnover and the method of calculating adjustments on joining or leaving the scheme, may be determined in accordance with notices published by the Commissioners.
12. New section 26B(8) provides that regulations may provide that the Commissioners may authorise a person to participate in the scheme from a date earlier than that of his application even if that is a date earlier than that on which the regulations came into force. They may also direct a person to leave the scheme from a date earlier than that of the direction.
13. New section 26B(9) provides that the regulations may make different provisions for different circumstances. It also provides that regulations may disapply or apply with modifications any provision contained in the Act or made under the Act.
14. Subsection (2) insets a new paragraph, (fza), in section 83 after paragraph (f).
15. New section 83(fza) provides the right to appeal against the Commissioners? decision in relation to (i) a refusal or withdrawal of authorisation to use the scheme, (ii) the appropriate percentage applicable in a person's case.
16. Subsection (3) inserts subsection (4ZA) after subsection (4) of section 84 of the Act (Further provisions relating to appeals).
17. New section 84(4ZA) provides that the tribunal shall only allow an appeal against a decision mentioned in section 83(fza) or, to the extent that it is based on such a decision, against an assessment if it considers that the Commissioners could not reasonably have been satisfied that there were grounds for the decision.
BACKGROUND
18. The scheme has been introduced as part of the Government's commitment to support small businesses and promote an entrepreneurial culture by simplifying the VAT system and easing the administrative burden of VAT on small businesses.
19. The Government announced its intention to introduce such a scheme in Budget 2001 and issued a consultation document in June 2001 inviting views on its proposals. The views of respondents have been fully taken into account in forming the final shape of the scheme.
20. The scheme has been devised in accordance with Article 24(1) of the Sixth Directive.