The Flat Rate VAT scheme is very popular with small businesses.
The Flat Rate Scheme is designed to simplify your records of sales and purchases. It allows you to apply a fixed flat-rate percentage to your gross turnover to arrive at the VAT due.
Fixed-rate percentages vary depending on the type of business. [HMRC VAT Notice 733]
The scheme is for businesses with a turnover no more than £150,000 a year, excluding VAT.
The problem is that HMRC feel the scheme has been abused and used as a way to pay less VAT especially by businesses with virtually no costs.
A Low or Limited Cost Trader would spend less than 2% on gross turnover, or less than £1000 on the purchase of goods.
From April 2017 they will get a special 16.5% flat rate.
Here are some of the businesses likely to be affected
- Accountancy and legal services 14.5%
- Journalism or entertaining 12.5%
- Computer or IT consultancy 14.5%
- Business services not listed elsewhere 12%
- Estate agents and property management 12%
- Management consultancy 14%
There are lots of other VAT schemes to choose from
Standard VAT Scheme – on this scheme the VAT is based on tax points from invoices
VAT Cash Accounting Scheme – if your turnover is below £1.35m you can account for VAT on a Cash basis, this is particularly helpful if your customers pay you on slower terms than you pay your suppliers
Annual Accounting Scheme for VAT – if your turnover is below £1.35m you could join the Annual Scheme and complete one return for the year but you make either 9 interim payments or 3 quarterly interim payments
Retail VAT Schemes – These are specific schemes aimed at mainly at shops and help to overcome the issues of mixed vat rate goods
VAT Margin Scheme – The margin scheme relates to second hand goods and accounts for VAT on the margin, for example on the sale of cars
They will all produce different answers!
Now might be a good time to make comparisons.