At Mcdade Roberts Accountants, we often get businesses contacting us with VAT questions. One question is should they join the Flat Rate Scheme. Read on to find out if it may or may not be right for your business.
The flat rate scheme for small businesses was introduced to reduce the administrative burden imposed when operating VAT. Under the scheme, a set percentage is applied to the turnover of the business as a one-off calculation instead of having to identify and record the VAT on each sale and purchase you make.
Who Can Join?
The scheme is optional and open to businesses that do not breach the relevant limits. A business must leave the scheme when income in the last twelve months exceeds £230,000, unless this is due to a one off transaction and income will fall below £191,500 in the following year. A business must also leave the scheme if there are reasonable grounds to believe that total income is likely to exceed £230,000 in the next 30 days.
Your turnover may be calculated in any reasonable way but would usually be based on the previous 12 months if you have been registered for VAT for at least a year.
When Is The Scheme Not Available?
The flat rate scheme cannot be used if you:
- Use the second hand margin scheme or auctioneers' scheme
- Use the tour operators' margin scheme
- Are required to operate the capital goods scheme for certain items.
In addition the scheme cannot be used if, within the previous 12 months, you have:
- Ceased to operate the flat rate scheme
- Been convicted of an offence connected with vat
- Been assessed with a penalty for conduct involving dishonesty.
How Flat Rate VAT Scheme Operates
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 generally range from 4% to 14.5%. In addition there is a further 1% reduction off the normal rates for businesses in their first year of VAT registration. More information about the percentage rates and the different trade sectors can be found here: https://www.gov.uk/vat-flat-rate-scheme
If your business falls into more than one sector it is the main business activity as measured by turnover which counts. You should review the position on each anniversary and if the main business activity changes, you should use the appropriate rate for that sector.
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 that they can reclaim input VAT at the appropriate rate.
Limited Cost Trader
A 16.5% rate applies for businesses with limited costs, such as many labour-only businesses. Businesses using the FRS, or considering joining the scheme, will need to decide if they are a 'limited cost trader'.
A limited cost trader will be defined as one whose VAT inclusive expenditure on goods is either:
- less than 2% of their VAT inclusive turnover in a prescribed accounting period
- greater than 2% of their VAT inclusive turnover but less than £1,000 per annum if the prescribed accounting period is one year (if it is not one year, the figure is the relevant proportion of £1,000).
Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:
- Capital expenditure
- Food or drink for consumption by the flat rate business or its employees
- Vehicles, vehicle parts and fuel (except where the business is one that carries out transport services - for example a taxi business - and uses its own or a leased vehicle to carry out those services)
These exclusions are part of the test to prevent traders buying either low value everyday items or one off purchases in order to inflate their costs beyond 2%.
Treatment Of Capital Assets
The purchase of capital assets costing more than £2,000 (including VAT) may be dealt with outside the scheme. You can claim input VAT on such items on your VAT return in the normal way. Where the input VAT is reclaimed you must account for VAT on a subsequent sale of the asset at the normal rate instead of the flat rate.
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
- The Tax Calculated As Due.
You must still keep a VAT account although if the only VAT to be accounted for is that calculated under the scheme there will only be one entry for each period.
Flat Rate VAT Still Confusing? Don't Worry, We Are Here To Help
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. McDade Roberts can advise as to whether the flat rate scheme would be beneficial for your business and we can also help you to operate the scheme. Please do not hesitate to contact us if you need any help.