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 The VAT flat rate scheme which came into effect in April 2002 is designed to make it simpler and quicker for small businesses to complete their VAT return.
This is because VAT is calculated as a particular percentage of their turnover and not as the difference between vat on individual sales and purchases. In particular there is no longer any need to record the VAT incurred on most purchases and determine whether it is reclaimable or not, so being less prone to error.
However, some business will also save on vat by using the scheme and some may pay more by using it as the percentages used are based on averages. It is important to calculate the financial effect as well.
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 £2000 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 the gross turnover comes to £20,000 and the percentage for the sector is 10%, the VAT due is £2000. If there was a large capital asset bought with £500 of VAT included, then the VAT payment would be £1500.
The invoices that the business raises must still charge VAT at the normal rate for the supply and not the flat rate.
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.
- A business must also have a total turnover, not including VAT, of no more than £187,500 in a year. Exempt and non-business income is added in as well to arrive at this figure.
- A business must not already use the second hand goods, the tour operators or capital goods scheme.
- 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.
The Business Sector Flat Rates
Different business sectors are given their own flat rate. Once a business has been accepted by HMRC, it will stay within the sector it has chosen.
A business must choose its sector on the grounds that it most closely describes its trading activities and set out in writing why it made the selection.
A full list of business sectors and their rates is available here on the HMRC web site
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.
Got a Question?
If you have any queries on any of the above, please ask a question
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