1. Summary of Key Points
- New businesses will often benefit from being in the scheme as they get a 1% VAT discount.
- VAT administration is much easier in the scheme, so most businesses with sales under £150k will benefit.
- There is much less chance of a VAT fine if you are within the scheme.
- The main pitfall is that you could pay more VAT in the scheme.
- Your expected sales need to be under £150,000 for the year if you are going to join.
- There is a special table which shows the scheme rate for every industry.
- There is a completely separate flat rate scheme for farmers with different rules to other industries.
2. Background
VAT is a complex tax. The VAT flat rate scheme is an attempt by the Government to relieve small businesses from getting involved in its complexities. This note provides a quick summary of the main issues.
3. Who can join the scheme?
For the 2009-2010 tax year any business can join providing it has reasonable grounds for believing that its sales for the next 12 months – excluding any VAT charged on invoices – will be below £150k. There are various extra rules dealing with businesses which have been in the scheme but whose turnover starts increasing. There are also some businesses which are excluded, especially those found guilty of a VAT offence in the past.
If you are a new business, it is often a good idea to join the scheme unless you will be spending a lot of money on non-capital items. The reason for this is that you get a 1% discount on the normal rate during your first year of VAT registration. Within the scheme you can still recover input VAT on capital items but not non-capital ones.
4. How do I join?
- By post – download the form at http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm. Send to National Registration Service, HM Revenue & Customs, Deansgate, 62-70 Tettenhall Road, Wolverhampton, West Midlands WV1 4TZ.
- By e-mail to frsapplications@hmrc.gsi.gov.uk.
- By calling the National Advice Service on 0845 010 9000.
5. The Scheme Rate
If you follow this link http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm#4 there is a table of all the rates by industry at the time of writing. It starts with “Accountancy or book-keeping” at 11.5%. Note that this scheme is only 5 years old and there have been various adjustments to it in recent Budgets, particularly when the main VAT rate was cut from 17.5% to 15.0%. It’s almost certain that the rates will rise again when the main rate changes back to 17.5% on 1 January 2010, which is why this note does not include the current rates by trade sector.
6. Submitting returns
It is normal to submit quarterly returns. However, you can also apply to use annual accounting along with flat rate scheme accounting if you want to. For businesses which are new to VAT it is advisable to start off on a quarterly basis until they’re confident about what they’re doing.
Calculating the VAT to pay is much simpler than under the normal rules. As an example, John begins trading as a sub-post office on 1 July 2009 and is sent a VAT return date of 30 September 2009 when he registers. During these three months, his turnover including VAT is £20,000.
The normal rate for postal services is a very low one, 2%. John is in his first year, so he can apply a 1% discount and use 1% for his VAT calculation.
VAT to pay = 1% x 20,000 = £200
7. Keeping Account of your VAT
Within the scheme, you still need to set aside an account in your system for VAT control. This will include:
- VAT on any invoices you raise at the standard rate of VAT.
- VAT on any significant capital items you wish to reclaim the input VAT on.
- The VAT due under the flat rate scheme calculation.
7. Separate Set of Rules for Farmers
A separate set of rules applies to farmers who wish to join the scheme, which is contained in a 14-page HMRC document – Notice 700/46. Most farmers will have the option of joining the flat rate scheme, providing they don’t have a sizeable income from non-farming activites such as rental income. Any farmer considering joining the scheme has to complete a special application – VAT 98 Flat Rate Scheme for Agriculture – and different rules apply both in the way such applications are processed, and in the way the scheme runs for farmers who are successful in their applications.
8. Pitfalls
There are some pitfalls in the scheme. Even though it’s quite easy to leave the scheme, you should consider these before joining it:
- You need to spend £2,000 on an item before you can claim input VAT. So it is not worth joining if you’re going to spend a lot in the coming months.
- The definition of the individual sectors is “woolly” at best. HMRC have mounted challenges on the sector being claimed by businesses – in one case they lost, they tried to say the flat rate being used should be 12% and not 2%.
- The rates for some sectors are very stingy. So double check before joining that it’s not going to cost you a lot in extra tax.
- Make sure you apply the flat rate % to total sales including VAT – many people get caught out by this.