Introduction
Businesses with sales of under £150,000 per year can use the flat rate VAT scheme. The aim of the scheme is to simplify record keeping.
On the sales side, the business will issue sales invoices to customers in the normal way. The customers will see no difference.
On the purchases side, the business will no longer record the gross, VAT and net amounts of each purchase separately. Instead the business will just record the amount paid out for each expense.
At the end of each quarter, the business will calculate the amount of VAT to pay over as a set percentage of the receipts from customers. Note that the calculation is on the receipts in the period and not on the invoices issued.
Advantages
HM Revenue & Customs say that the benefits of the flat rate scheme are more than just financial:
- Easier record-keeping - no need to separate out the gross, VAT and net in your accounts.
- More time for you - less work doing the books so you can get on with running your business.
- Fewer rules to follow - no more problems about what 'input tax' you can and cannot reclaim. No more fuel scale charges for VAT.
- Peace of mind - less chance of mistakes, so fewer worries.
- Certainty - you always know how much of your takings you will need to pay.
These are the advantages for businesses that have to be VAT registered. It is possible for smaller businesses to gain an advantage by voluntary registration, see below.
Disadvantages
The flat rate percentage is an average for the type of industry. Some businesses will gain and some will lose out.
You are particularly likely to lose out if you have two different types of business activity or you are exporting goods or you more regularly than usual buy and sell second-hand vehicles for use in the business.
You will still need to adjust the calculation if you buy capital assets with an individual purchase price (including VAT) of £2,000 or more.
When you cannot use the scheme
You cannot use the scheme if:
- Your main business is as a dealer in second-hand good such as cars or antiques or you are a tour operator.
- You are a member of a VAT group or are closely associated with another business.
- You have recently stopped using the scheme.
There are various other circumstances in which you cannot use the scheme.
How it will appear in the financial statements
A normal profit and loss account will show the income and expenses, excluding VAT. This will change for a business using the flat rate scheme.
Sales will be the gross sales value less the VAT paid to HMRC. For example, if you charge a customer £1,000 plus VAT of 17.5%, he will pay you £1,175.00.
Without the flat rate scheme, your sales would show as £1,000.
If the flat-rate percentage is 10%, the amount that you will pay to HMRC is £117.50. Your sales will then show in the financial statements as £1,175.00 - £117.50 = £1,057.50.
An expense will now show at the gross amount. What previously was an expense of £50 (plus VAT) will now show in the financial statements as £58.75.
The overall profit of a business that is already registered should be similar to the old method but will be slightly up or down depending upon whether you have gained or lost by using the flat-rate percentage.
Benefiting by voluntary registration
If the customers could not recover the VAT, a business would not wish to register voluntarily because the VAT would simply be an additional cost. However, if the customers are commercial organisations that can recover the VAT there may be advantages in registering so that the business can recover the VAT on expenses.
Naturally, there are administrative costs associated with running a VAT scheme but the flat-rate scheme may reduce these to an acceptable level.
Suppose a management consultant has sales before VAT of £40,000. If he registers voluntarily he will charge his customers £40,000 + 17.5% = £47,000. However he will pay to HMRC £47,000 x 12.5% = £5,875 and keep the difference of £1,125. This assumes, of course, that the customer will not try an renegotiate the contract price.
The 1% bonus
In order to encourage adoption of the scheme, businesses may use a flat-rate 1% lower than the normal rate until the day before the first anniversary of first registration for VAT.
How to apply
We will help you complete a simple application form and submit it to the appropriate VAT office. Currently, there is some delay in these offices but eventually you will receive a notification saying whether your application has been accepted and the start date.
Our recommendation
Although there are some advantages in using the flat-rate scheme, it is not right for everybody. We would be pleased to discuss how it would affect you and to estimate how much you might save or lose by changing over.
More details of the scheme can be found in HMRC Notice 733.