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
Standard VAT Scheme – on this scheme the VAT is based on tax points from invoices
Flat Rate VAT Scheme – If your turnover is below £150k you could join the Flat Rate Scheme, this scheme applies a % to your sales to work out your VAT Liability, it can make VAT returns easier to complete and in can sometimes work in your favour as the Flat Rates may mean you pay less VAT, if you join in your first year of VAT registration you get an extra 1% off the rate for the first year.
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!
We have a Flat Rate comparison Tax Calculator that can help
Recently there have been lots of concerns about the Flat Rate Scheme
HMRC previously insisted that all consultants should chose the category ‘management consultants’ (flat rate: 14%), even if they were consultants in health and safety, employment, or marketing. Now those businesses who do not describe themselves as management consultants are free to choose the category ‘business services not listed elsewhere’ (flat rate:12%).
Another area that caused confusion was the advice in para 4.4 of the previous version of VAT Notice 733, that all engineering consultants and designers should choose the category for ‘architect, civil and structural engineer or surveyor’ (flat rate 14.5%).
Usually, how much VAT a business pays or claims back from HM Revenue and Customs (HMRC) is the difference between the VAT they charge customers and pay on their purchases.
Many small businesses assume there is only one type of VAT scheme, the standard VAT scheme where you pay VAT on Sales and reclaim VAT on Purchases but in fact there are several schemes and they could save you money:
Cash Accounting
Using the Cash Accounting Scheme, you:
pay VAT on your sales when your customers pay you
reclaim VAT on your purchases when you have paid your suppliers
You can use the Cash Accounting Scheme if your estimated VAT taxable turnover during the next tax year is not more than £1.35 million.
Cash Accounting can improve your cashflow if your customers pay later than you need to pay your suppliers.
Flat Rate Scheme
You can join the Flat Rate Scheme for VAT and so pay VAT as a flat rate percentage of your turnover if:
your estimated VAT taxable turnover – excluding VAT – in the next year will be £150,000 or less.
Generally you don’t reclaim any of the VAT that you pay on purchases, although you may be able to claim back the VAT on capital assets worth more than £2,000
There’s a one per cent reduction in the flat rate percentages for your first year of VAT registration.
You can get a list of Flat Rates by following this Link
Flat Rate is easy to use and can save you money if you have a lower than average level of VAT purchases.
Annual Accounting Scheme
Using the Annual Accounting Scheme, you make either nine interim payments at monthly intervals, or three quarterly interim payments, throughout the year. You only need to complete one return at the end of each year. At that point you must pay any outstanding amount. If you have overpaid, you will receive a refund.
You can use the Annual Accounting Scheme if your estimated VAT taxable turnover for the coming year is not more than £1.35 million.
This could save you money by saving time.
Retail Schemes
Using standard VAT accounting, if you are VAT-registered then you must record the VAT on each sale in your accounting records. But with the VAT retail schemes, you work out the value of your total VAT taxable sales for a period – for example, a day – and the proportions of that total that are taxable at different rates of VAT (standard, reduced and zero) according to the scheme you are using. You then apply the appropriate VAT fraction to that sales figure to calculate your VAT due.
You do not need to record VAT separately in your accounts for each and every retail sale you make. This is particularly beneficial if you make a number of low value and/or small quantity sales to the general public. This can save you a lot of time and record keeping.
Margin Schemes
Normally you charge VAT on your sales, and reclaim VAT on your purchases. However, if you sell second-hand goods, works of art, antiques or collectibles, there may have been no VAT for you to reclaim when you bought them. You may be able to use a VAT margin scheme. This enables you to account for VAT only on the difference between the price you paid for an item and the price at which you sell it – your margin. You won’t pay any VAT if you don’t make a profit on a deal. You can still use standard VAT accounting for other sales and purchases such as overheads.
For SME’s there are lots of options, here is a quick summary:
Standard VAT Scheme – on this scheme the VAT is based on tax points from invoices
Flat Rate VAT Scheme – If your turnover is below £150k you could join the Flat Rate Scheme, this scheme applies a % to your sales to work out your VAT Liability, it can make VAT returns easier to complete and in can sometimes work in your favour as the Flat Rates may mean you pay less VAT, if you join in your first year of VAT registration you get an extra 1% off the rate for the first year.
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
