Commentary

V7.229 Flat rate scheme—consider all forms of business income

Part V7 Tax planning
Part V7 Tax planning | Commentary

V7.229 Flat rate scheme—consider all forms of business income

Part V7 Tax planning | Commentary

V7.229 Flat rate scheme—consider all forms of business income

It is crucial that all advisers are aware of the issues raised in this section because the income sources are very common for many individuals.

The starting point is to remember that a VAT registration includes all supplies made by a 'taxable person'. Hence, a sole trader who runs a restaurant and also repairs cars will need to account for VAT on both activities if he is registered. However, there would be no problem if the two activities were undertaken by different legal entities, eg if the sole trader was in a partnership in the car repair business with his friend.

Buy-to-let income—excluded or included?

Example 4

Steve is an accountant who is registered for VAT as a sole trader. He uses the flat rate scheme (14.5% rate for accountants) and also owns a flat in Leicester that he rents out for £1,000 per month. Does he also apply the flat rate scheme percentage to his rental income?

Solution – as explained in a previous section, a disadvantage of the scheme is that the relevant percentage is applied to exempt and zero-rated business income, and rental income is definitely exempt. However, is the income from a buy-to-let arrangement classed as business or private income? Unfortunately, any income derived from the exploitation of land is always classed as business income.

Unfortunately, the view of HMRC is that rental income must be included because of the EU definition of 'economic activity' (Directive 2006/112/EC, art 9(1)). To quote from

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