What is the VAT Flat Rate Scheme?
Generally, when fulfilling their VAT obligations with HMRC, VAT registered businesses will deduct the VAT charged on their purchases from the VAT they charge on their sales to customers.
The VAT Flat Rate Scheme enables businesses to pay VAT at a fixed percentage of VAT to HMRC (lower than 20%), depending on their type of business – see the list of the relevant sectors and their specific rate of VAT here. This means that the business can keep the difference between what they need to pay HMRC and what they charge to their customers.
It is important to note that the flat rate percentages are on the VAT inclusive amounts, so if, for example you are a retailer of cosmetics, you will be charged a flat rate of VAT of 8%, however this is in effect 9.6% when comparing to the standard rate of VAT of 20%.
For the main details surrounding who needs to register for VAT generally, please see article Who needs to register for VAT?
Are you eligible to join the VAT Flat Rate Scheme?
To be eligible to join the VAT Flat Rate Scheme a business must have an annual turnover of £150,000 or less (excluding VAT).
A business must leave the scheme if on the anniversary of joining, their turnover in the last 12 months was more than £230,000 (including VAT) – or they expect it to be in the next 12 months.
What are the advantages?
In addition to the lower rates, it has other advantages in that it simplifies bookkeeping and record keeping as all sales are at the same rate.
The VAT Flat Rate Scheme also offers a further 1% tax discount on the published percentages on your first year as a VAT registered business.
What are the disadvantages?
The main disadvantage is that the business is not able to claim input tax on purchases; therefore, it may only be worthwhile joining the scheme if the business has low purchases.
However, if they are too low, the business may be classified as a ‘limited cost trader’, a new rule which took effect from 1 April 2017. This means that if the purchases of the business are less than £1,000 a year or less than 2% of sales, the flat rate applicable to the business is 16.5%, and if you consider that this is on the VAT inclusive amount, it is essentially a rate of 19.8%, very close to the standard rate of VAT of 20%.
There is some good news in this respect in that the 1% discount is still available for limited cost traders, and therefore in their first year, a VAT registered business could pay at a rate of 15.5% (18.6% on VAT inclusive amount) – this could still be beneficial if the business has very few/low value purchases.
Another disadvantage is that although the business does not need to include out of scope for VAT items within its turnover, it does need to include zero-rated goods. For example, if the business sells goods overseas, the business would now need to pay output tax at the relevant flat VAT rate rather than at 0%.
Will Brexit have an impact on the VAT Flat Rate Scheme?
It should not, as sales of goods to both EU and non-EU countries are zero rated, so both before and after Brexit, the sale of goods to EU countries will need to be included within taxable turnover under the VAT Flat Rate Scheme.
As you will see, there are several factors at play here, so please feel free to get in touch if you would like assistance, or to discuss if and how you should register for VAT generally, or for the VAT Flat Rate Scheme.
Farley Kaye FCA
Managing Partner
For more information please contact Farley:
farley.kaye@fkgb.co.uk
052 627 7472
