Flat Rate Scheme, VAT

Introduction

The flat rate scheme is designed to help small businesses by taking some of the work out of recording VAT sales and purchases. If you use the scheme you apply a single percentage to your turnover in a VAT period. The result is the VAT you pay to H M Revenue & Customs.

Who can join the scheme?

The scheme is for businesses with a turnover no more than £150,000 a year, excluding VAT. You must leave the scheme if your turnover increases so that there are grounds for believing it will rise above £225,000 in the next 30 days alone. It is unsuitable where you regularly receive repayments of VAT

How the scheme operates

Input tax is the tax charged to you by other businesses. Under normal VAT accounting, you can claim this back on your quarterly VAT Return. If you use the flat rate scheme, you do not recover input tax or VAT on imports or acquisitions. This is because the flat rates are calculated to represent the net VAT you need to pay. An allowance for input tax is built into the flat rates. There are special rules for high value capital goods.

VAT due is calculated by applying a predetermined flat rate percentage to the business turnover of the VAT period. This will include any exempt supplies and it will therefore not generally be beneficial to join the scheme where there are significant exempt supplies.

The percentage rates are determined according to the trade sector of your business, and range from 2% to 13.5%. In addition there is a further 1% reduction off the normal rates for businesses in their first year of VAT registration.

The purchase of capital assets costing more than £2,000 including VAT may be dealt outside the scheme. You can claim input VAT on such items on your VAT return in the normal way but if you do you must account for VAT on a subsequent sale of the asset at the normal rate instead of the flat rate.

Although you pay VAT at the flat rate percentage under the scheme you will still be required to prepare invoices to VAT registered customers showing the normal rate of VAT. This is so they can reclaim input VAT at the appropriate rate.

Combining the flat rate scheme with other schemes

The flat rate scheme can be combined with the annual accounting scheme which could save time calculating VAT liabilities avoid a big bill by evening your VAT over the year and would only require one VAT Return to be submitted per year. The cash accounting scheme cannot be used with the flat rate scheme but the flat rate scheme has its own cash based method that is very similar. Similarly the flat rate scheme has its own retail based method that is very similar to ordinary retail schemes. If you sell a significant proportion of second-hand goods using margin schemes or the auctioneers scheme, the flat rate scheme will be of limited value to your business. This is because the rate rate scheme calculates VAT on the total received for your sale rather than on the margin

Records to keep

Under the scheme you must keep a record of your flat rate calculation showing your flat rate turnover, the flat rate percentage you have used and the tax calculated as due.

An Example

IT Consulting Limited has a turnover of £130,000 per annum and re-claims input tax of £300 per quarter.

It currently has an annual VAT bill of £130,000 at 20% = £26,000 less VAT claimed per annum of £1,200 = £24,800.

Under the flat rate scheme its annual VAT bill would be £156,000 at 14.5% = £22,620.

This gives a saving of ££2,180. Assuming an on-going corporation tax rate of 20% this gives a net benefit of £1,744.

This ignores capital purchases and the fact that an extra 1% discount applies to new registrations.

Further Information

For more detailed information click on the image below:

Summary

The scheme is designed to reduce administration although it will only be attractive if it does not result in additional VAT liabilities. The only way to establish whether your business will benefit is to carry out a calculation and comparison of the normal rules and the flat rate rules.

We can advise as to whether the flat rate scheme would be beneficial for your business and to help you operate the scheme. Please contact us by telephone on 01299 879140 for further details.