VAT Flat Rate Scheme

As we know under standard VAT accounting VAT is charged on goods & services usually at one of the three VAT rates, and is recovered to the extent that it relates to taxable purchases.  The business then pay over, or reclaim, the difference between the two in a reporting period.  Here are some pointers.

To be eligible to join the scheme the business must have a VAT taxable turnover, exclusive of VAT, of £150,000 or less.  They remain eligible for the scheme until their total business income exceeds £230,000.  A business cannot join the scheme if they:

  • have been in the scheme in the previous 12 months;
  • use one of the margin schemes for second hand goods, art antiques and collectibles, Tour Operators Margin Scheme, or Capital Goods Scheme;
  • are, or have been within the previous 24 months, eligible to join an existing VAT group or registered for VAT as a division of a larger business;
  • are closely associated with another business; or
  • have been convicted of a VAT offence or charged a penalty for VAT evasion in the last year.

The Flat Rate Scheme allows a trader to pay a flat rate of VAT, based on his trade, calculated from his sales.  This can allow a trader the ability to save time and help smooth cash flow.  As there is no need to record each transaction in a VAT ledger you can save time in your book keeping.  Do note, however, this doesn’t change the invoicing requirements relating to VAT!  Also, as the VAT payable is purely based on what your client has traded, there are fewer rules to follow.  This means you no longer have to worry about what expenses they can reclaim and which are blocked.  And in your client’s first year of registration they get a 1% discount in the rate payable, offering an actual cash discount to them.

Of course, as with all VAT schemes there are winners and losers in opting to follow the Flat Rate Scheme.  As it looks at an average trader within a sector, and accounts for zero and exempt sales within its percentage calculation, any client making a lot of zero rated or exempt sales, or any trader who would generally receive a VAT repayment under standard VAT accounting will probably find the scheme offers them no advantage.  Likewise a client who purchases a lot of items at standard rate may find that as they cannot reclaim VAT on their purchases it doesn’t offer a fiscal incentive.

However, any capital assets worth more than £2,000 that are purchased, you are allowed to recover the VAT on the goods.  However, this then creates a VAT liability upon disposal, and there are specific rules about what would qualify.

If a business joins the Flat Rate Scheme all they need to is look at what rate their industry sector has been assigned.  For example, an accountant or book keeper is currently liable for a 14.5% flat rate.  This would mean that they owe VAT to the value of 14.5% of their turnover for the period, or 13.5% in their first twelve months of registration within the scheme.

Finally, there are special rules for farmers, barristers, advocates, and florists who wish to use the scheme.

In terms of areas to consider, our advice is that use of the Flat Rate Scheme should be considered prior to use and the benefits v costs established. In particular:

  • • Remember all income (not just standard rated income) is included in the calculation so this has the effect of taxing exempt sales.
  • A comparison between use of the FRS and standard VAT accounting is a must.
  • Consider and pick the most appropriate rate and encourage clients to notify you of any changes – HMRC are unlikely to accept change of rate after the event and have case law to support this.
  • Consider forthcoming purchases to ensure these are planned – whilst capital items can be claimed outside the scheme, individual items under £2,000 or large scale purchases of services (including construction services) are not, so any known large expenditure will be worth planning prior to using the scheme.

If you have any questions about the scheme, please do not hesitate to contact us.