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Andrew Needham of VAT Specialists Ltd looks at the possible benefits of the VAT Flat Rate Scheme.

Introduction

The Flat Rate Scheme was introduced in Budget 2002, and is available to all small businesses. This article explains the scheme and shows how to determine whether it is advantageous to join.

What is the Flat Rate Scheme?

The scheme provides an alternative to the normal method of VAT accounting. The normal method is based on a declaration of output VAT on goods and services provided, less the input VAT incurred on purchases and expenses. The exact net amount of VAT is then paid over to HMRC.

With the Flat Rate Scheme, you pay VAT as a flat percentage of your VAT-inclusive turnover instead of working out VAT on all purchases. The percentage to be applied varies according to the trade sector of your business.

How will the scheme help me?

Firstly, it will simplify your accounting - less time spent on keeping VAT records and calculating the net VAT payable. Secondly, it might even increase your profits, depending on your input VAT levels.

Who can join the scheme?

You can join the scheme if within the next 12 months:

• your annual taxable turnover (not including VAT) does not exceed £150,000; and
• your total turnover (including VAT) will not be more than £225,000

Claiming back VAT

Under the scheme, you do not normally claim back VAT, since the flat rate takes account of VAT you have paid to your suppliers. However, you can claim for any single capital asset costing £2,000 or more (including VAT).

Should a small business join?

The answer is “probably yes”, although it depends on your business sector, the level of turnover, and also on the amount of VAT purchases you incur.

Example

As an example, take an IT contractor in the trade sector of ‘Computer and IT Consultancy’ with a fixed rate of 11.5%. The net turnover is £100,000, and standard-rated VAT thereon £15,000, so the gross sales figure is £115,000.

Flat Rate = 10.5% (discounted by 1% in first year).
VAT to pay = £115,000 x 10.5% = £12,075
Difference = (£15,000 - £12,075) = £2,925

The £2,925 surplus is retained as profit. However, any input VAT on accountancy fees, computer consumables, etc. is not recoverable, and therefore reduces the surplus.

For a typical contractor earning between £50,000 and £100,000 per year, there is a possibility of a surplus of £1,500 or more. Of course, this surplus would be reduced in subsequent years, as the 1% reduction in the first year expires, and the usual sector rate of 11.5% comes in. In the above example with no input VAT, the surplus would be reduced from £2,925 to £1,775.

As a general rule of thumb, the lower your levels of input VAT are, the more likely it is that the flat rate scheme will be beneficial. Moreover, the higher your sales turnover, the more beneficial it is likely to be. You can find your appropriate sector rate from the HMRC website using the following link: Flat Rate Scheme for VAT

Find out your rate and do your own calculation. Don’t forget to apply the 1% discount applicable in the first year!

How do I join the scheme?

The simplest way to join is to call the VAT advice line on 0845 010 9000, which take your VAT registration number and relevant details on the telephone. Alternatively, you can download the scheme application form from HMRC using the following link: Application to Join the Annual Accounting Scheme and the Flat Rate Scheme

The above article is taken from VAT Voice, a bi-monthly publication from VAT Solutions (UK) Ltd.