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Flat Rate Scheme for VAT

Flat Rate Scheme for VAT

The VAT Flat Rate Scheme is a special scheme which is designed to minimise paperwork for the taxpayer and to make it easier for HM Revenue & Customs to check the returns.

In return, HMRC give you a tax break that can put pounds into your pocket, but the Flat Rate Scheme does have some complications, so you do need to make sure that this is the best option for you.

Flat Rate Scheme basics

If you are registered for VAT then you pay over the VAT on all your sales, and get a credit for the VAT on all your expenses.

Under the Flat Rate Scheme, you pay an agreed percentage of your gross income, and cannot claim any credit for VAT on your expenditure.  The agreed percentage depends upon the exact nature of the work you do, and a table of the relevant rates for various trades is maintained by HMRC.

A simple example will best illustrate: if you issue invoices worth £10,000 in a quarter, you would normally charge VAT of £2,000 which you would in turn be liable to pay over to HM Revenue & Customs.

If we assume that under the Flat Rate Scheme your percentage is 12%, and using the above details, then the revised computation is as follows:

£
Gross income£12,000
FRS percentage12%
VAT payable£1,440

This means that you make an extra £560 (£2,000-1,440) to cover the VAT on any costs you may have incurred on business expenses.

For the first 12 months, the Flat Rate Scheme percentage is also reduced by 1% as a further incentive to use the scheme.

Capital Expenditure

Although VAT on expenses are not recoverable, HMRC allow you to recover the VAT where you buy an item of capital such as a new machine or a van costs more than £2,000 including VAT.  In those circumstances, the VAT is recoverable as normal.

Pitfalls

One of the biggest pitfalls that can arise is where there are zero rated sales, for instance if are invoicing a company in The Netherlands then they will expect you not to charge them UK VAT.  But this invoice must be included in your Gross Income in the above example, potentially leaving you out-of-pocket as you have not been able to charge them VAT.

This does not apply when invoices are out with the scope of VAT, for instance on sales to Norway which is outside the EU and where VAT cannot be charged.

The second pitfall relates to the Flat Rate percentage to be applied, and you must be sure that the rate is beneficial to you.  This is usually only relevant if you have substantial costs on which VAT is paid, and if you are in a labour only trade, then it is usually a ‘no-brainer’ about being Flat Rate Scheme registered.

Next steps

If you want to use the VAT Flat Rate Scheme, then you need to provide us with the following information in addtion to your personal details, which we may already hold:

  • Business bank details (to prove to HMRC you are a valid business)
  • Date to register for VAT (can be backdated by a few months)
  • Exact nature of the business, or the Flat Rate percentage you believe applies to you
  • Your National Insurance number
  • Details of any previous VAT registrations you were involved in during the last three years

We will then register you for VAT, which takes 4-6 days, and arrange to become your VAT agents.  Each VAT quarter afterwards, you will give us with details of your income and we will compute the VAT due to be paid and send the Return on your behalf.

A direct debit from the business bank account will be set up, and HMRC will draw the money automatically from your account.

You ned to give us the information by the 15th of the month after the quarter end and the return has to be submitted by the 7th of the next month, or penalties will arise, and the direct debit will be taken on the 10th day of the next month.

So, if your VAT quarter ends on 30 June, we need the information by 15 July, with a final submission date by 7 August; and the money is taken from your account on 10 August.