Flat Rate VAT Scheme

Flat rate VAT can be a confusing process to an otherwise simple solution to handling VAT compliance.

In our effort to keep our clients more informed regarding the taxes they pay and the options open to them we have put together another short blog.

The scheme was set up to reduce the admin burden on small companies in meeting their Vat requirements but certain exceptions, changes to the rules and calculation of the liability has left many misunderstanding the principle.

The Basics

With the scheme a company or individual who is registered for Vat (Voluntarily or Compulsory) with turnover under £150,000 can simply pay a set percentage of their earnings as VAT.

This means that they cannot reclaim VAT on their expenses to offset against their Output Vat.

The standard 20% VAT is still charged on their invoices.

The entity must apply to use the scheme it is not automatic.

Percentage

The percentage paid is set by HMRC depending on the industry in which the trade operates these can be found on the link at the bottom of the blog.

The percentage is applied to the Gross income (Net + Vat) and it is this which is payable to HMRC.

Limited Cost Trader

A new rule was introduced to stop trades taking advantage of generous percentages on which they incurred minimum expenses.

A trade by which has no or little direct costs has to use a set percentage of 16.5%.

Direct costs would be costs directly applicable to a sale e.g. Fuel for a Taxi Driver or Wallpaper for a decorator.

If these costs are under £250 a quarter or less than 2% of total turnover, then a percentage of 16.5% must be used.

Capital Expenses

The scheme does however allow the reclaiming of Input VAT on large capital purchases to avoid the necessity to change VAT scheme just to reclaim large amounts.

Any capital item costing over £2000 including VAT can have the VAT element offset against their liability.

Leaving the Scheme

It’s possible that this scheme may not remain beneficial possibly as Business’s begin to incur more Vatable expenses so the scheme can be left voluntarily. If already in the scheme, then a turnover limit of £230,000 must not be exceeded otherwise a new scheme must be used.

Example

John Smith has started a new business as a Health and Safety officer who accesses offshore oil rigs all around the countries coastlines. He is very busy and has a full calendar of work and charges £2000+Vat a week.

He has recently purchased a Van for £1800+Vat to help him get around easier, he can never trust the trains to run on time.

He has registered for the Flat Rate VAT scheme as he is over the annual threshold of £85,000 and his only expense is his fuel. He doesn’t always have a lot of time to get all his receipts to his accountants.

This Vat quarter runs from January – March.

His VAT return would be compiled as follows.

OUTPUT VAT

12 (Weeks) x £2,400 (£2000+Vat) = £28,800

£28,800 x 16.5% = £4752.00

As his only expense is his fuel he will be classed as a limited cost trader and have a percentage of 16.5.

INPUT VAT

£1,800 x 20% = £360.00

The total cost of the Van £2,160 is above the threshold of £2000 so VAT can be reclaimed.

VAT Liability

£4752.00 – £360.00 = £4392.00

 

John has met all his VAT liabilities as set out by law. He has charged his clients £4,800 of Vat and paid over £4752.00 so he has a 1% net gain for registering for flat rate VAT.

He was also able to reclaim the VAT on his capital purchases.

To meet his VAT filing requirements all he had to do was send a copy of his invoices and a receipt for the van to his accountant.

 

Disclaimer: This blog is for information purposes only designed to inform people regarding the treatment of the VAT flat rate scheme participants We cannot be held accountable for actions taken based on this information and advise that professional services are sought in dealing with VAT affairs. Information based on tax law at the date of posting.