Key Facts
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?
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. The turnover test applies to your anticipated turnover in the following 12 months. 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.
How to Join the Scheme
To join the scheme you can apply by post, email or phone and if you are not already registered for VAT you must submit a form VAT1 at the same time. You may not operate the scheme until you have received notification that your application has been accepted and HMRC will inform you of the date of commencement. When is it not available? The flat rate scheme cannot be used if you:
How the 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 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. If your business falls into more than one sector it is the main business activity as measured by turnover which counts. This can be advantageous if you have a large percentage rate secondary activity and a modest major percentage trade. You should review the position on each anniversary and if the main business activity changes or you expect it to change during the following year 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. Illustrative Calculation
Pros of the Flat Rate Scheme
The ability to earn money from VAT, you can earn thousands of pounds extra each year simply out of VAT (the government does this as the FRS is simple for them to manage and you are in affect acting as a tax collector).
A reduced amount of paperwork to handle as you are not submitting any of your input costs to HMRC all you need to do is keep the receipts from your purchases. If you are a new business, using the flat rate scheme in your first year, you receive a further 1% decrease on the overall percentage tax you pay each quarter.
Cons of the Flat Rate Scheme If you are buying lots of stock or have high VAT chargeable expenses you will miss out on reclaiming the VAT.
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. Items under the capital goods scheme are excluded from the flat rate scheme.
Transactions with EC Members
Income from sales of goods is included in your turnover figure. Where there are acquisitions from EC member states you will still be required to record the VAT on your VAT return in the normal way even though you will not be able to reclaim the input VAT unless it is a capital item as outlined above. The rules on services are complex. Please get in touch if this is an issue so that we can give you specific advice.
Record Keeping Under the scheme you must keep a record of your flat rate calculation showing:
Stay ahead of the game We can advise as to whether the flat rate scheme would be beneficial for your business and help you to operate the scheme.
Who can join the Scheme?
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. The turnover test applies to your anticipated turnover in the following 12 months. 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.
How to Join the Scheme
To join the scheme you can apply by post, email or phone and if you are not already registered for VAT you must submit a form VAT1 at the same time. You may not operate the scheme until you have received notification that your application has been accepted and HMRC will inform you of the date of commencement. When is it 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. The scheme will clearly be inappropriate if you regularly receive VAT repayments.
How the 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 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. If your business falls into more than one sector it is the main business activity as measured by turnover which counts. This can be advantageous if you have a large percentage rate secondary activity and a modest major percentage trade. You should review the position on each anniversary and if the main business activity changes or you expect it to change during the following year 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. Illustrative Calculation
Pros of the Flat Rate Scheme
The ability to earn money from VAT, you can earn thousands of pounds extra each year simply out of VAT (the government does this as the FRS is simple for them to manage and you are in affect acting as a tax collector).
A reduced amount of paperwork to handle as you are not submitting any of your input costs to HMRC all you need to do is keep the receipts from your purchases. If you are a new business, using the flat rate scheme in your first year, you receive a further 1% decrease on the overall percentage tax you pay each quarter.
Cons of the Flat Rate Scheme If you are buying lots of stock or have high VAT chargeable expenses you will miss out on reclaiming the VAT.
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. Items under the capital goods scheme are excluded from the flat rate scheme.
Transactions with EC Members
Income from sales of goods is included in your turnover figure. Where there are acquisitions from EC member states you will still be required to record the VAT on your VAT return in the normal way even though you will not be able to reclaim the input VAT unless it is a capital item as outlined above. The rules on services are complex. Please get in touch if this is an issue so that we can give you specific advice.
Record Keeping 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. 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.
Stay ahead of the game We can advise as to whether the flat rate scheme would be beneficial for your business and help you to operate the scheme.