Flat rate VAT scheme

Is the VAT flat rate scheme right for you?
Whether or not the VAT flat rate scheme is beneficial for you would depend upon the administration costs saving due to its simplicity weighed against the fact that in most circumstances, input VAT cannot be reclaimed.

HMRC have a handy ready reckoner on their website for you to quickly calculate the VAT effect of joining the scheme. Some businesses, in particular those with exempt supplies, may be worse off under the scheme.

Simplified VAT returns
The VAT flat rate scheme was introduced in 2002 to make VAT accounting easier for small businesses.

The simplified scheme means that businesses using the flat rate scheme do not need to identify input VAT on their purchases and overheads, instead VAT is calculated as a fixed percentage of gross sales (ie sales + output VAT).

For example if your net sales in the quarter was £20,000. Gross sales would be £23,500 (ie £20,000 + 17.5% output VAT). If your flat rate percentage is 12.5% then you would pay £2,937.50 VAT at the end of the quarter.

Input VAT is not deductible.
Under the flat rate scheme, input VAT is not deducted in your VAT return and from the amount payable to HMRC, so the scheme is not suitable for all businesses. However you can reclaim the VAT you have been charged on a single purchase of capital expenditure goods where the amount of the purchase, including VAT, is £2,000 or more.

Cash based VAT return.
The flat rate VAT scheme has its own cash based option, you simply apply the flat rate percentage to the VAT inclusive supplies for which you have been paid in the accounting period. You can also apply to join the annual accounting scheme and only submit one VAT Return per year.

Who can apply for the VAT flat rate scheme?
You can apply to use the scheme if there are reasonable grounds for believing that you meet both of the following tests:

Test 1
Your taxable turnover (excluding VAT) in the next year will be £150,000 or less and,

Test 2
Your total business income (including VAT and exempt supplies, such as rent, lottery commission or bank interest on a business account and any other income received or receivable by your business) in the next year will be £187,500 or less.

1% reduction in the flat rate for the first year.
As an incentive to join the scheme, new entrants receive a 1% reduction on their flat rate percentage for the first year of VAT registration.

Reverse charge VAT on Adwords

Although your Adwords spend is taken into account when calculating your VATable supplies for VAT registration purposes, it is not included in your flat rate turnover on your VAT return (see section 6.4 of the VAT Guide 733).

Aquisitions of goods from other EC member states

You must include the “deemed VAT” at 17.5% of the acquistions in Box 2 of your flat rate return. This puts you in the same position as if you had bought the goods from a UK supplier as the input tax (charged at 17.5%) would not deductible in your flat rate VAT return.

Feel free to contact us to discuss your business and whether the VAT flat rate scheme is suitable for you.