Wisteria Accountants

VAT can often be a complex tax to deal with and the administration and rules are often burdensome. HMRC however do offer a number of schemes which are meant to help simplify these requirements. One of which is the VAT Flat Rate Scheme.

Normally when calculating VAT that you pay to HMRC and in its simplest form, you take the difference between the VAT you charge to customers (output VAT) and the VAT you incur on your purchases (input VAT). A flat rate scheme instead allows you to pay a fixed percentage rate of your VAT inclusive turnover. Different types of businesses should pay different fixed percentages of VAT, depending on the business sector. The scheme is designed for small businesses and therefore you can only join the Flat rate scheme if your VAT taxable turnover is less than £150,000.

There are a number of benefits of moving to a flat rate scheme these could include:

• You will have a lot less work to do as it is much easier to correctly calculate the VAT that you pay to HMRC.
• You are less likely to make mistakes as you are not making as many calculations.
•  You will always know how much VAT you will be paying to the taxman.
• It is a lot simpler to comply as there are fewer rules to follow.
• In your first year you can get a discount of 1% on your VAT return saving you money. This is a 1% discount of your sector’s percentage that applies straight up until the 1 year anniversary of your business being VAT registered.
• It could also be beneficial from a financial point of view as you could end up saving money on the amount of VAT that you need to pay, where the actual VAT input tax you incur is actually less than expected by HMRC.

How to work out how much VAT you pay with a flat rate scheme.

The fixed percentage that you use depends on the sector that you would consider your business to be in. You can only have one fixed percentage rate. This means that even if you believe that different aspects of your company lie in different sectors you must choose the sector that you believe describes your business best on a whole. As noted above in your first year of VAT registration you receive a discount of 1% so this must be taken into account when applying your percentage.

Once your percentage has been chosen, you will need to register for the scheme with HMRC and the you apply it your total ‘flat rate turnover’. Your flat rate turnover is all the supplies your business makes. This includes VAT inclusive sales for standard rate, zero rate and reduced rate supplies.

You must always be aware of what your flat rate is for your chosen sector. This is because it can change at any time. If this change does happen you must start using your new percentage from the date that it comes into force.

Although you do not have to record how much VAT you charge on every sale in the normal way, you must still show a VAT amount on each sales invoice. You must also keep a record of the flat rate percentage that you have used in every VAT period.

A flat rate scheme is not the most beneficial scheme for everybody. You should probably avoid the flat rate scheme if you buy a significant amount of mostly standard-rated items, as you cannot generally reclaim any VAT on your purchases. You should also avoid it if you regularly receive a VAT repayment under standard VAT accounting. Although it is ok to have a flat rate scheme if you make zero rate and exempt sales, it should probably be avoided if you are continually making them.

If you wish to join the Flat Rate Scheme you can do it at the beginning of any VAT accounting period.

It is also easy to leave the flat rate scheme if you decide that it is not for you. It is common to leave at the end of a VAT period but you can leave at any time as long as you notify HMRC. You must also make sure that you leave the flat rate scheme if your total turnover and expected turnover for the next period is £230,000 or over.

Before deciding this scheme is right for you, you should always contact a professional for further advice. To speak with one of Wisteria’s VAT specialists, please call us on 0208 952 0140.