Choosing a flat rate scheme category

Deciding on the category for “business activity” when registering for the flat rate scheme can prove tricky.

One general approach to take is to consider how the business activity would be described to a person on meeting them for the first time using everyday words where possible, such as accountant, decorator, builder etc. Then, review the list of flat rate scheme categories on the HMRC website here.

If you cannot identify a match between the category and activity then one of two miscellaneous categories must be chosen. These are “any other activity that is not listed elsewhere” or “business services that are not listed elsewhere”. Both of these categories have a flat rate scheme percentage of 12% so the category chosen is not important. HMRC provide examples in the link provided above of trades which they think are included within each category. Please note that these are for guidance only.

Selecting the wrong category

HMRC do not normally check the choice of sector when processing flat rate scheme applications. If a mistake has been made in selecting a category then you may pay too much or too little tax. Paying too little could mean that you are faced with an unexpected VAT bill at a later date.

It is important to note that if HMRC approve your application then they will not change your choice of sector retrospectively as long as your choice was reasonable. It would be good practice to maintain a record of the reason for your choice of sector in case HMRC enquire at a later date.

“Management consultancy” category

There is a point of view which suggests that HMRC overly encourage the use of the “management consultancy” category. For reference, the definition of management consultancy according to the Management Consultancies Association is “the practice of creating value for organisations, through improved performance, achieved by providing objective advice and implementing business solutions.”