VAT Flat Rate Scheme Guide

The government established the VAT flat rate scheme with the intention of making the VAT part of trading easier for small businesses. It means that your VAT is worked out by applying a single percentage to your turnover and this is the amount you owe to HMRC.

How can the VAT Flat Rate Scheme benefit my business?

It is mainly seen as a massive time saver, as it reduces the need to record individual VAT on what you buy and sell.

The simplification of the system should also decrease the amount of hassle involved in your quarterly VAT returns. It may also make it clearer to see how much you owe in VAT and, therefore, have a more accurate cash flow figure.

The most attractive reason to join the scheme is that it could save your business money on its VAT bill.

You can join the Flat Rate VAT Scheme if your business’s turnover forecast is a maximum of £150,000 in the year you join.

To work out your turnover figure you can use what you have entered on your previous VAT returns, if you are VAT registered.

Alternatively, you can consider information you have submitted on loan applications or business plans, the previous owner’s turnover and/or the actual trading figures running up to the point of your application.

If you get it wrong and you can ‘show your working out’, then there is no penalty if your turnover goes over the predicted figure.

So keep evidence of all the calculations you used and the information you based them on. If it is obvious that you plucked a figure from the air with no foundation, then you will be ejected from the scheme.

Will I have to leave the scheme if my turnover grows over time to more than £150,000?

The maximum total income you can make and remain in the scheme is £230,000 per year.

Who is not eligible to join the VAT Flat Rate Scheme?

There are a number of circumstances that will make you ineligible to join the Flat Rate VAT scheme:

  • If you are in a VAT Group (or have been, within the last 2 years)
  • If you are not VAT registered
  • If you have to use the tour operator’s margin scheme
  • If you are in the auctioneer’s scheme
  • If you are in the second-hand margin scheme
  • If you are making a new application, but left the scheme less than 12 months previously
  • If you have been convicted or got a fine for a VAT offence or anything involving ‘dishonesty’ in the previous 12 months
  • If you have to use the Capital Goods Scheme for particular items
  • Your business is in ‘association’ with another business in particularly specified ways

Can I still claim back input tax under the Flat Rate Scheme?

When other businesses add VAT onto your bill for their services, it is called input tax. If you join the Flat Rate Scheme, this is accounted for within the averaged percentage VAT you pay. This means that you can no longer claim an allowance for input tax.

Which schemes work together with the Flat Rate VAT scheme?

‘Annual accounting’ works with the Flat Rate Scheme and should mean that less time is spent calculating how much VAT you owe. It may also reduce the total amount of VAT you pay over a year.

Schemes that don’t work well with the VAT FRS are:

  • Margin scheme for second-hand goods
  • Retail schemes – the Flat Rate Scheme includes something similar
  • Cash Accounting – the Flat Rate Scheme has similar provision

Which terms of business association affect my eligibility to join?

Your business must be associated with another in particular ways in order for your eligibility to be affected. For example, if any of these apply:

  • The practical reality of how much your company is governed by the instruction of another business
  • Your business is under the direction of another
  • One of the businesses is dominated by the other
  • Your business is interconnected with another company in terms of finances or structure

What is the flat rate for this VAT scheme?

Each business is assigned to a ‘sector’ and each sector has its own flat rate. If it is not clear cut, then there are the options of ‘Business not mentioned elsewhere’ within manufacturing, business services and retail.

You can find a list of the VAT flat rate scheme sectors here.

An example is the sector General building or construction services (where materials supplied are 10% or more of turnover).

Trades included in this sector:

  • Alterations and extensions to commercial or domestic buildings or civil engineering works
  • Building completion
  • Earth moving, demolition and landscaping
  • Electricians
  • Floor and wall coverings
  • Glaziers
  • Joiners/carpenters
  • Other building equipment installers
  • Painters
  • Plasterers
  • Plumbers
  • Road, airfield, sports facility and water project building
  • Roofers

Flat rate VAT for sector = 9.5%

A ‘1% off’ newcomers gift!

You are entitled to deduct a further 1% from your flat rate for the first year you are VAT registered. The year is noted from when you register to 12 months later.

What if the shape of my business changes during the year?

Simply review the balance of your business on the annual anniversary of joining the scheme. If a larger proportion of your turnover is now generated form a different sector, then the different percentage can be applied from this time.

What is included and excluded in my flat rate turnover?

This has a variety of caveats for specific anomalies, but the table below shows what must be included and excluded in the calculation of your flat rate turnover.

All the supplies made by your business

  • Capital expenditure goods
  • Intra EC supplies
  • Any Exempt income on the Notice 700 list in The VAT Guide
  • Income from reduced rate, standard rate and zero rate supplies (VAT inclusive)
  • Interest from your bank
  • Money from the sale of private goods, not connected to business
  • Private income (e.g. shares)
  • Capital expenditure goods sold and you have claimed input tax for
  • Gold sales, (VAT Act Section 55, Notice 701/21 Gold)
  • Income from outside the business
  • Supplies out with UK VAT regulations

There are other ‘Special Circumstances’ which have specific regulations for particular business types or situations. For example, if your business trades outside the UK, you need to comply with the regulations that contain specific details relevant to your business type.

It is important to get professional advice or double-check your understanding to ensure you are complying with everything that is relevant to your business.

Three ways of calculating turnover within the Flat Rate VAT Scheme

Basic Turnover
A simple change if you have been using an invoice based accounting system. The best option if the majority of your dealings are with other VAT registered businesses.

To use this method you take the total of the supplies that have their tax point in the VAT period you are accounting for and work out the relevant flat rate percentage for the business

Retailer’s Turnover
Just like a retail scheme. The best option if you mainly sell to the public as a retailer. It is based on your daily takings, added to any other income generated by your business, and applies the flat rate percentage relevant to your business type.

Cash Based Turnover
just like cash accounting. If your customers pay late or you give extended credit then this is the option for your business.

It is based on when you are paid, not when you deliver. To use this method you use the flat rate percentage for your business type on the amount you have been paid in the relevant accounting period.

Legal Record Keeping Requirements

It is crucial that you have a record of your business’s flat rate calculation readily available for any HMRC assessment. HMRC state that accounting records for businesses in the Flat Rate Scheme must be “complete, orderly and easy to follow”.

  • Flat rate percentage used
  • Flat rate turnover for the relevant period of time
  • The tax you owe, based on the above figures
  • Copies of VAT invoices given to customers

In short, keep your paperwork in order and make sure you have receipts and copies of invoices as evidence of your business dealings.

What about capital expenditure goods?

Using the Flat Rate Scheme does not lead to being able to claim capital expenditure on more items. Capital Expenditure goods are items that are bought to be used in the business that are non-consumables. They may wear out and need to be replaced after a period of time, but are not regularly replaced. For example, a computer printer would be considered capital goods, but paper and ink are not. Input tax can be reclaimed for these items.

The Flat Rate Scheme incorporates all the usual items allowed, but excludes the following:

  • Items bought for reselling
  • Items that are completely used within one year
  • Items bought to hire out, lease or let for payment into the business
  • Items that will be sold on after being incorporated into other items

What VAT can I reclaim on capital goods if I am in the Flat Rate Scheme?

You can reclaim the VAT on any single purchase of capital goods that is £2,000+ (including VAT).

Other input tax is already part of the flat rate percentage, so you cannot submit claims for services, anything under £2,000 or multiple purchases.

What does ‘single purchase’ mean?

These are the same VAT rules that apply in any calculations, whether you are in the Flat Rate Scheme or not. Basically, input tax can only be reclaimed on individual purchases of £2,000+, but this bill can be for more than one item. For example, buying new equipment for your hotel kitchen renovation that includes an oven, fridge, chest freezer and dish washer. If you buy these from one supplier and the total is at least £2,000, then you can reclaim the VAT. If you buy them individually from different suppliers, then the total on each receipt must still be at least £2,000 to be able to reclaim the VAT. It is the number on each single receipt that is the defining factor, not how much you spend overall.

What are ‘goods and services’ in this situation?

‘Services’ involve things that are never fully owned by your business; for example, a vehicle hired by your company.

It also involves the delivery of skills, but not actual capital items. For example, a builder constructs an extension to his own office using his own time and materials. No VAT is reclaimable as he has supplied his own service, not capital goods.

‘Goods’ basically means items that are or will be owned by your business. For example, buying an item on hire-purchase that costs more than £2,000. The business can claim input tax because it will be owned by the business.

What’s the difference between ‘goods’ and ‘capital goods’?

You need more space for your business. Buying the construction materials necessary to build an extension are not considered capital expenditure goods and no VAT is reclaimable.

If you buy another shop to work from, freehold, then this would be considered capital expenditure and VAT can be reclaimed.

Goods that are for ‘lease, let or hire’

Anything that is bought to generate income is not classed as capital expenditure, regardless of its cost. This means indirect income, like a van bought for deliveries and direct income, like marquees to hire out for parties.

What about all the work use/private use regulations?

To keep it simple, the private use of work capital expenditure goods does not need to be worked out or included in any input tax claims. This is different to the VAT regulations for those not in the Flat Rate VAT Scheme.

How do I apply for the Flat Rate Expense scheme?

You can make an application from when you register for VAT. You will need all your business information to hand to complete the application including:

  • VAT registration number;
  • all business contact details; and
  • the relevant business sector and its percentage.

We can help you register and deal with all of the paperwork for you. Just get in touch today to find out more.

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