Smaller businesses can elect to join the flat rate scheme which allows them to apply a set percentage to their total turnover as a one-off calculation instead of working out the VAT on each sale and purchase they make.
Please Note: A significant change to the VAT Flat Rate Scheme came into effect on 1st April 2017. Click Here to find out more.
Who can join?
The scheme is optional but only businesses that have a turnover below a certain limit are permitted to join. The current limit allows business with a turnover not likely to exceed £150,000 (excluding VAT) to join the scheme. Businesses must leave the scheme when income in the previous twelve months is greater than £230,000. A business must also leave the scheme if they expect total income to be greater than £230,000 in the next 30 days.
You must wait for HMRC confirmation before operating the scheme.
When can I not use the scheme?
The scheme cannot be used if you use any of these schemes:
- second hand margin scheme
- auctioneers’ scheme
- tour operators’ margin scheme
- capital goods scheme
Also, the scheme cannot be used if, within the previous 12 months, you have:
- ceased to operate the flat rate scheme
- been convicted of a VAT offence
- been assessed with a penalty for dishonesty.
If you usually receive repayments of VAT, the flat rate scheme is unlikely to be appropriate.
How the scheme operates
You calculate the VAT due by applying the flat rate percentage that applies to your business sector to the gross turnover of the VAT period. you will need to include any exempt supplies.
The table here summarises the current percentages. Please note that a further 1% reduction applies in the first year of VAT registration.
If your business has activity that could fall into more than one sector, you must select the sector that accounts for the greater part of your turnover. The percentage should be reviewed each year to ensure that it is still appropriate.
Although you use a specific percentage to calculate the VAT you owe to HMRC, you must still invoice your customers using the standard rate of VAT; currently 20%.
Treatment of capital assets
Records to keep
Under the scheme you must keep a record of your flat rate calculation showing:
- your turnover
- the percentage you have used
- the tax due.
Summary
Although the scheme was introduced to reduce administration, it will only be attractive if it does not result in additional VAT liabilities. The only way to establish this, is to carry out the necessary calculations.
VAT Flat Rate Scheme Changes – 1st April 2017
From 1st April 2017, the government introduced a new definition of a ‘limited cost trader” (see definition below) to the flat-rate vat scheme. The result is that affected contractors must use a new percentage of 16.5% The introduction of this new rate means the flat rate scheme is no longer suitable for the vast majority of Contractors who will now generally be better suited to the standard rate VAT scheme, where they can at least offset some of the VAT paid on purchases against what they have to pay HMRC.
The definition of the newly introduced category of a “limited cost trader” is one whose VAT “inclusive” expenditure on “goods” is either; less than 2% of their VAT inclusive turnover, or less than £1,000 in total, per year.
If you are unsure which VAT scheme will be most suitable for you, please contact our team on 02476 426360 who will be happy to advise you.
How can we help?
We can perform the necessary calculations to demonstrate whether the scheme will result in VAT savings for you. Please do not hesitate to contact us, if you would like us to help.
