My first post on this great forum. I hope anyone can shed some light for me to solve a small doubt I have.
I help my husband with the accounts of his consulting company (limited company) and the company is using the flat rate scheme to manage its VAT account. So far everything has been easy as the only transactions of interest were the invoices issued to clients. However, the company is now starting to generate interest from loaning funds to third parties and I'm unsure if the interest income is to be included in the calculation of the flat rate turnover. I contacted the HMRC VAt help line but I never got an answer from them.
I understand from HMRC guidance that interest earned on bank/saving accounts is excluded from the flat rate turnover.
From this month, the company is also receiving interest from:
- the main director, this is payment of interest on an overdrawn director loan account (this is to avoid BIK)
- third parties, interest earned by lending money via P2P loan platforms.
Can anyone confirm whether these two types of interest income should be included in the calculation of the flat rate turnover as they are not exactly the same as interest earned from a bank.
Hi Marie I think the issue here is more that it is to do with peer to peer lending, rather than just a straight forward interest query, which is all relatively new in the tax arena with HMRC still trying to work out the best ways to deal with various aspects of tax and several court cases setting precedent in various parts. The question to me - is it an interest coupon, is it a fee or is it actually a debt receivable. I dont believe we have actually got enough enough information, without knowing what position you play in the P2P arena and more importantly without seeing actual contracts to make an assessment here.
We do have a VAT expert on here although I havent seen him around for a couple of weeks so Im guessing he is quite busy. I was going to try to do a bit of digging but to be honest Im swamped and I am not actually an Accountant anyway. I would suggest the best thing would be to approach your Accountant for him to dig into this specialist area a bit more with the benefit of the contract. Or failing that approach HMRC VAT unit stating that you want a formal decision on it - they can do this but often will only do it with the request in writing and they will certainly respond in writing - then that correspondence will be on file in the event of any VAT inspections.
Unless someone comes along in the next few days who can advise in this area, of course.
Hope you get it sorted.
-- Edited by Cheshire on Tuesday 22nd of September 2015 11:23:22 AM
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Joanne
Winner of Bookkeeper of the Year 2015, 2016 & 2017
Thoughts are my own/not to be regarded as official advice,which should be sought from a suitably qualified Accountant.
You should check out answers with reference to the legal position
Thanks for your reply. It's good to see that I'm not the only one that seems to be confused by this area. I do agree that P2P lending is a rather new development of the last few years and unfortunately the fact that HMRc is still trying to sort things out will not help us get our VAT return done correctly, especially when the VAT unit is not answering our query.
In my mind the P2P lending is just a regular loan. The company loans money to a third party, receives interest every month and the capital back at the maturity of the loan (or earlier if the borrower chooses to). There is no coupon as such and the money received is definitely not a fee (such as an arrangement fee for the loan). I'm not sure why it is so difficult for HMRC to work out what to do with this.
Perhaps I'm oversimplifying things... And our accountant is not sure either and is "investigating"... Not sure where this leaves us...
Interest is Investment income and should really not be treated as trading income. This is why it is not included in turnover for VAT purposes. This is also why it should always be separated on the CT600 return for companies, and on the SA return for individuals etc.
Les (I presume you are the original person who answered the query so well) I notice your comment on the other forum that HMRC did not appeal. I am more surprised that it went to appeal, as it would cause additional implications to the way HMRC treat interest both paid and received for other tax purposes. Putting it in turnover would then allow deductions for expenses against interest earned, which I can see HMRC wanting to be allowed!
@Les - yes, we posted our query on the Taxation Web forum too. Just trying to gather as much feedback as possible and that seemed a more appropriate forum for tax queries. I hope that's not a problem. You answered our query on both sides.
Thank you for taking the time to do that.
@Frauke - Thanks for your input. I do agree that investment income should not be considered part of business turnover. We just can't find any reference to validate that.
We have heard back from our accountant (after nudging him!) and he provided all the references for us. The answer we received from him clashed with the input provided on this forum. It does not sound like good news unfortunately.
According to our accountant we need to refer to VAT Notice 701/49 (finance), section 4.1.
"If in the course of your business for a consideration you:
...
- advance money in the form of loans
...
your supply is exempt. The charge you make for a loan, advance or credit facility is usually described as interest. The value of the exempt supply in the grant of credit or loan is the gross interest or other sum received, but not the repayment of capital loaned."
And according to VAT Notice 733, section 6.2, exempt income is to be included in the flat rate turnover. Is 'exempt income' the same as 'exempt supply' ?
I guess that interest received by the company from the director and from P2P loans will need to be included in the flat rate turnover and therefore we will have to pay a percentage of the company's earned interest over to HMRC as VAT under the FRS. Bank interest will not be included (VAT Notice 733, section 6.3).
I believe this is what we will do as we don't really have any reference to argue against our accountant's solution.
If you download the document, you will find details of current legislation and where to find the rules which apply to P2P interest payment.
Exempt income should not have VAT charged on it. I have just had a quick look at the VAT notice 733, section 6.2, the turnover it refers to is to assess if your turnover qualifies for the flat-rate scheme or not. But this does not mean you should include it as Income on the VAT return for VAT purposes.
Have I misunderstood, why you were asking about how you should treat this income?
Thank you very much for the document about the consultation. I had not heard about it and it does make for interest reading.
I don't know if I explained myself clearly in my previous posts.
My issue is to establish if VAT must be paid over to HMRC under the FRS for the interest income that our company received from loans. I guess the issue is to establish if the interest income is 'exempt' income or 'out-of-scope' for VAT purposes. The VAT notice our accountant is referencing clearly states that interest income (from loans) is an 'exempt' supply. And the last paragraph in section 6.2 of VAT Notice 733 says:
"Note: as exempt and zero rate supplies are included in your flat rate turnover you apply the flat rate percentage to the exempt and zero rate turnover."
So if the interest income is 'exempt' income then the flat rate percentage should be applied to it too.
Not sure if I'm explaining myself clearly.
Example:
If we have these source of income for a VAT quarter:
- interest from director (for overdrawn director loan, paid to us gross) = £300
- interest from P2P loans (paid to us gross) = £2,400
- interest from bank account = £8 ()
Then my understanding of our flat rate turnover is: VAT-inclusive sales + zero-rated sales + exempt income = £12,000 + £800 + £300 + £2,400 = £15,500
Bank interest is excluded because HMRC VAT notice related to FRS says so.
We then apply our flat rate percentage to the flat rate turnover to get the amount of VAT to pay over to HMRC under the FRS. £15,500 @ 14.5% = £2,247.50
This means that a portion of the interest that our company received will be paid to HMRC as VAT. We charged our clients £2,000 VAT but we end up paying HMRC £2,247.50, the extra 247.50 simply cuts into our profit thus reducing the return we get on our loaned funds.
This is what our accountant wants us to do and the VAT notices seem to support that. If we increase our loans activity in the future we might be better off de-registering from the FRS...
I hope I clarified it a bit.
Thank you for your support, I really like this forum !
Not sure where this leaves us...
