VAT – Flat Rate Scheme

At AHACCOUNTANTS, we can guide businesses in the Nottingham area on the VAT Flat Rate Scheme, which aims to simplify VAT administration for small businesses.

Overview of the Flat Rate Scheme

The VAT Flat Rate Scheme allows small businesses to pay VAT based on a fixed percentage of their turnover instead of calculating VAT on each sale and purchase. This reduces the administrative burden associated with VAT compliance.

Who Can Join?

• Eligibility Criteria:

• • The scheme is optional and available to businesses with an anticipated taxable turnover (excluding VAT) of £150,000 or less over the next 12 months.
  • A business must leave the scheme if its income exceeds £230,000 in the last twelve months, unless HMRC is satisfied that income will fall below £191,500 in the following year.
  • A business must also exit if there are reasonable grounds to believe that total income will exceed £230,000 in the next 30 days.

• Turnover Calculation:

• • The turnover test is typically based on the previous 12 months if the business has been VAT registered for at least a year.
  • Applications can be submitted by post, email, or phone, and if not already VAT registered, a VAT1 form must be submitted.

• Notification of Acceptance:

• • Businesses may not operate the scheme until they receive written confirmation of their application from HMRC, which will also inform them of the start date.

When is the Scheme Not Available?

The flat rate scheme cannot be used if the business:

• Uses the second-hand margin scheme or auctioneers’ scheme.
• Uses the tour operators’ margin scheme.
• Is required to operate the capital goods scheme for certain items.
• Has ceased to operate the flat rate scheme in the previous 12 months.
• Has been convicted of a VAT-related offence or penalised for dishonesty.

This scheme is also inappropriate for businesses that regularly receive VAT repayments.

How the Scheme Operates

• VAT Calculation:

• • VAT due is calculated by applying a predetermined flat rate percentage to the business’s turnover for the VAT period. This includes exempt supplies, which may make the scheme less beneficial for businesses with significant exempt sales.

• Flat Rate Percentages:

• • Percentages vary by trade sector, typically ranging from 4% to 16.5%. New businesses in their first year of VAT registration benefit from a 1% reduction off the normal rates.
  • If a business operates in multiple sectors, the rate is based on the main business activity by turnover.

• Invoice Requirements:

• • Although VAT is paid at the flat rate, businesses must still issue invoices to VAT-registered customers, showing the normal rate of VAT to enable them to reclaim input VAT.

Example Calculation

For instance, if Cook & Co has a VAT-inclusive turnover of £79,000 with the following breakdown:

• Standard-rated catering supplies: £70,000
• Zero-rated takeaway foods: £5,500
• Exempt flat rentals: £3,500

Calculation:

• Using a flat rate of 12.5%:
  • Flat Rate VAT: 12.5% x £79,000 = £9,875
• In contrast, the normal calculation would yield:
  • Output VAT: (£70,000 x 20/120) = £11,667 less input tax.

Limited Cost Trader

A flat rate of 16.5% applies to limited cost traders, defined as those whose VAT-inclusive expenditure on goods is:

• Less than 2% of their VAT-inclusive turnover, or
• Greater than 2% but less than £1,000 per annum.

Certain expenditures, such as capital expenses and food/drink for staff, do not qualify as goods for this measure, ensuring traders cannot inflate costs artificially.

Treatment of Capital Assets

• Purchases of capital assets costing over £2,000 (including VAT) may be dealt with outside the scheme, allowing businesses to reclaim input VAT on these items as per normal VAT rules.
• Items under the capital goods scheme are excluded from the flat rate scheme.

Record Keeping

Under the Flat Rate Scheme, businesses must maintain records that include:

• Flat rate turnover.
• The flat rate percentage used.
• The tax calculated as due.

A VAT account must also be kept, but it will typically only have one entry per period if only the flat rate calculation is accounted for.