The VAT Flat Rate scheme is available to businesses with turnover of £150,000 or less per annum. It is advantageous to small businesses as the VAT payable to HMRC is calculated as a percentage of gross sales rather than 20% of net sales.
If you choose the Flat Rate Scheme you cannot claim back VAT on your purchases except if you make a single capital purchase which exceeds £2,000 including VAT. This includes one or more purchases from the same supplier totalling £2,000 or more but purchases less than £2,000 from different suppliers are excluded even if they are all bought at the same time. A service amounting to more than £2,000 including VAT is also excluded from a VAT claim.
The advantage of choosing the Flat Rate Scheme is that record keeping is much simpler. You have to record all your sales gross so that you can calculate the VAT due on the total. If you are using accounts software sales will be recorded as net plus VAT but the calculation on the VAT return will be calculated on the gross. All purchases except those outlined above are recorded gross using a No VAT tax code so they are not included on the VAT return. And because you are not claiming VAT on purchases it is not as vital to obtain and retain the VAT receipts. However you may still have to prove your business expenditure to a tax inspector so it is still sensible to retain and file receipts.
The percentage rate you can use varies from business to business - you have to apply to HMRC to join the flat rate scheme and agree with them the percentage rate you think is correct for your trade. If you choose the flat rate scheme when you first register for VAT you will be able to reduce the agreed percentage rate by 1% for the first year. Whatever percentage rate is agreed with HMRC you must still charge your customers the standard rate of VAT (currently 20%).
If the goods you purchase for your business total less than 2% of your turnover or are less than £1,000 per year you will have to use a fixed rate of 16.5% instead of the percentage shown for your trade.
You can find a link to the Flat Rate percentages here.
The Flat Rate VAT scheme suits business which have only a few purchases per year on which they could claim VAT. For example, if you provided business services totalling £120,000 per annum gross and used the Flat Rate Scheme you would pay 12% of this total (£14,400). If you used the VAT Standard Accounting Scheme you would pay 20% of net sales (£20,000). You would, of course, be able to deduct VAT on your purchases but you would need £28,000 (excluding VAT) of purchases with VAT on over the year in order to reduce your VAT to £14,400.
It is really worth doing the calculation to see if this scheme would suit your business. This scheme is only available to businesses with turnover of less than £150,000 per annum and you have to leave it as soon as you are likely to reach a turnover of £230,000 per annum.
If you need help with keeping your accounts or doing your VAT return give us a call.