VAT FLAT RATE SCHEME- ATTENTION POINTS
The VAT flat Rate Scheme has been introduced by HMRC to ease down the administrative burden of filing the quarterly VAT return or so-called standard VAT return for small businesses. It is designed to simplify the sales and purchase records rather than to offer a tax break. Often abbreviated as VAT FRS, it allows paying a fixed flat rate percentage on your gross turnover to calculate the VAT due, which varies depending on the type of business you are engaged in.
Difference b/w Flat rate scheme and standard VAT:
- Standard VAT allows businesses to reclaim the VAT paid on services and goods from other companies. However, under flat rate scheme businesses cannot claim input tax on imports and acquisitions except for certain capital assets over £2,000.
- Businesses having low input VAT are capable of making an additional profit under flat rate scheme, however under standard VAT if output tax exceeds the input tax, businesses will be required to pay HMRC the difference.
- As standard VAT returns must be filed on a quarterly basis it includes considerable amount of admin and paper work. On the contrary flat rate schemes minimize the amount of time spent on administrative tasks.
- There is no VAT charged on exempt and zero rates sales on the standard VAT scheme, however under the flat rate scheme you will still need to account to HMRC for the VAT, which you may end up paying more VAT by being on the scheme. This is something must be considered before joining the scheme if most of your sales are exports, Zero rate, and reduced rate.
Who can join?
Small businesses can apply to use the schemes if:
- eligible to be registered for VAT
- your taxable turnover (excluding VAT) in the next year will be £150,000 or less
- your business is not associated with another which means follows:
- one business is under the dominant influence of another.
- Businesses are closely bound in terms of economic, finance and organizational links or another company having the right to give direction to your business
- Your company complies in practice with the direction of another in terms of commercial reality.
HMRC has put forth some additional rules in Section 3 (3.6) of VAT Notice 733 regarding businesses who cannot join the scheme in more detail.
The VAT flat rate usually depends on your types of business. HMRC gives a 1% discount if you’re in your first year as a VAT registered business. However, if you spend a small amount on goods you’ll be classed as a “limited cost business” and you need to pay a higher rate of 16.5% owing to the conditions below:
- If your good cost less than 2% of your turnover or
- £1,000 a year, in case if your costs are more than 2%
You can calculate if you need to pay the higher rate to find out which goods count as costs.
For businesses other than “limited cost business” different flat rates are designed according to their type and category they may belong to.
Goods that doesn’t count as costs
- any services – which is anything that isn’t goods
- expenses like travel and accommodation
- food and drink eaten by yourself or your staff
- vehicle costs including fuel unless you’re in the transport business using your own, or a leased vehicle
- rent, internet, phone bills and accountancy fees
- gifts, promotional items and donations
- goods you will resell or hire out unless this is your main business activity
- training and memberships
- capital items for example office equipment, laptops, mobile phones and tablets
How to join?
Call the VAT helpline.
How to calculate future taxable turnover?
If you are not VAT registered when applying for the flat rate scheme, you may forecast your turnover by considering the following:
- any period of trading before you apply
- information on business plans or loan applications
- the turnover of the previous business owner
Howbeit if you have been registered on VAT, you may look at the turnover declared on your returns keeping in mind any expected changes. HMRC will not penalize you if your forecast turns out to be low provided reasonable grounds for your forecast. So, it is advised to keep a record of figures used to calculate your future turnover. In absence of a reasonable basis, HMRC may exclude you from the scheme from the date your ineligible use began.
In case your turnover rises once you have joined the scheme for the year ending more than £230,000, you will be ceased to be ineligible to use the scheme. However, if HMRC is satisfied that the total value of your income for the next 12 months will not exceed £191,500, you may be eligible to remain in the scheme.