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VAT Flat rate scheme

2019-09-02T11:22:27+01:00May 10th, 2019|Categories: Blog, VAT|Tags: , , |0 Comments

The VAT flat rate scheme (FRS) is used by many small businesses to help simplify their VAT reporting obligations, although some VAT experts would argue that the scheme is not simple to use.

Broadly, the FRS is a simplified VAT accounting scheme for small businesses, which allows users to calculate VAT using a flat rate percentage by reference to their particular trade sector. When using the FRS, the business ignores VAT incurred on purchases when reporting VAT payable, with the exception of capital items which cost £2,000 or more. If the business incurs few expenses, and it operates in a sector with a relatively low FRS percentage, it will pay out less VAT to HMRC under the FRS than it would outside the scheme. Historically, many businesses have registered for VAT voluntarily before their turnover reached the VAT registration threshold, so they could make use of the cash advantage offered under the FRS.

Common percentages used by service-related businesses in recent years include:

– Accountancy and legal services 14.5%
– Computer or IT consultancy 14.5%
– Estate agents and property management 12%
– Management consultancy 14%
– Business services not listed elsewhere 12%

Since 1 April 2017, a new 16.5% FRS rate has applied for businesses with limited costs (see below). Since the rate of 16.5% of gross turnover equates to 19.8% of the net, the result is that there will be almost no credit for VAT incurred on purchases.

A ‘limited cost’ business is 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 these purposes must be used exclusively for the purpose of the business but exclude the following items:

– capital expenditure goods;
– 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%.)

Further information on the FRS can be found here.

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VAT Flat Rate Scheme

2018-06-29T00:01:51+01:00June 27th, 2018|Comments Off on VAT Flat Rate Scheme

VAT Flat Rate Scheme

 

The VAT flat rate scheme is designed to make it simpler and quicker for small businesses to complete their VAT return.

This is because VAT payable to HMRC is calculated as a particular percentage of the gross turnover of the business and not as the difference between VAT on individual sales and purchases. In particular there is no need to record the VAT incurred on most purchases and determine whether it is reclaimable or not, so there is less chance of error. The amount of VAT charged to customers remains the same whether using the flat rate scheme or not.

However, some business will pay less VAT by using the scheme and some may pay more by using it as the percentages used are based on the average VAT payable by particular trade sectors. It is important to calculate the financial effect before applying to use the scheme.

The Flat Rate Scheme Calculation

These are the steps in the calculation…

  • The output VAT for a VAT return is established by multiplying the VAT-inclusive turnover by a fixed percentage which is determined by the sector in which the business operates. This goes in Box 1 on the return.
  • All turnover is included in the taxable supplies it has made, whether standard, reduced, zero rated or even exempt and it is the gross turnover. This figure goes into Box 6.
  • Usually no VAT can be reclaimed on purchases but there are exceptions for any VAT on purchases before the business was registered and VAT and on a single capital asset that costs over £2,000 inclusive of VAT can be reclaimed. The VAT on these goes in Box 4 as usual and the net amount of the purchase in Box 7.

So if for example your gross turnover comes to £20,000 and the percentage for the sector is 10%, the VAT due is £2,000. If what you purchased was a capital asset for £3,833 including £500 of VAT, then the VAT payment due would be £1,500.

To qualify to join the scheme…

  • A business must have a taxable turnover, excluding VAT, of no more than £150,000 a year. The taxable turnover is the total value of supplies or sales made by the business that are liable to a VAT whether at standard, reduced or zero rates, but excluding any expected sales of capital assets.
  • A business must not already use the second hand goods, the tour operators or retail schemes.
  • The business must not be required to use the capital goods scheme for certain capital items.
  • A business must not have been found guilty of a VAT offence in the past year or be associated with another business or registered as part of a VAT group in the past 2 years.

A business must apply to join the flat rate VAT scheme and can leave whenever it chooses by informing HMRC in writing.

From April 2017, the government will introduce a new 16.5% rate for businesses with limited costs, such as many labour-only businesses. This will help level the playing field, while maintaining the accounting simplification for the small businesses that use the scheme as intended

The Business Sector Flat Rates

Different business sectors must use their own flat rate.

A business must choose its sector on the grounds that it most closely describes its main trading activities. If the trading mix changes, so say the majority of the turnover comes from supplying restaurant meals rather than alcoholic drinks the trade sector to be used will change from ‘Pubs’ (6.5%) to ‘Catering Services’ (12.5%). The change in sector should be made from the start of the VAT period that contains the anniversary of joining the scheme.

It is advisable to set out in writing why you made the selection of trade sector.

1% Reduction in First Year of VAT Registration

In your first year of VAT registration there is a 1% reduction in the flat rate that is applied to your turnover. The reduction is for the 12 months following the date of VAT registration and not the date of joining the flat rate scheme. There is no entitlement to the 1% reduction if you register for VAT 12 months after you were required to register.

A Trap in the Flat Rate Scheme

The flat rate must be applied to all business income, including rents and sales of assets where VAT was not reclaimed, such as cars or property, but not interest received from business bank accounts. This means you effectively pay VAT on the gross receipts of sales on which you have not collected any VAT.

If you are a sole-trader the flat rate should be applied to any letting income you receive in your sole name, as lettings are regarded as a business for VAT purposes. Lettings undertaken as a partnership, perhaps jointly with your spouse, are not counted as part of your sole-trader business income. When you sell a let property the flat rate should be applied to the total proceeds. You can withdraw from the flat rate scheme before you sell a high value item such as a property, but you have to stay out of the scheme for at least 12 months.

How We Can Help You

We can advise you on the suitability of the flat rate scheme for your business, applying to join the scheme and assistance with completion of your VAT returns.

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