MSB Accounting Limited

If your VAT taxable turnover is less than £150,000, using the Flat Rate Scheme could save you time and smooth your cash flow.

What is the VAT Flat Rate?

A simplified method of calculating VAT due: it is based on a fixed percentage of your VAT-inclusive turnover from all sources. There is no need to record the VAT included in your purchases (it is taken into account in calculating the flat rate percentage).

The latest range of Flat Rate percentages were fixed when VAT was increased to 20% January 2011. These percentages correspond to different business sectors. You must choose the sector that best describes your main business activity for the coming year and apply that percentage to your total turnover.

The Flat Rate Scheme also allows you to adopt a form of cash accounting so you will only pay VAT on VAT-inclusive turnover paid in the relevant quarter.

When can I join?

You can join the Flat Rate Scheme at the beginning of any VAT accounting period. If you register for the Flat Rate Scheme in your first year of VAT registration, you can take advantage of a one per cent reduction in your flat rate percentage.

Should I use it?

The key planning point is to work out the net cost of running with the Flat Rate Scheme before you register.

Your business may be better off adopting the 'Flat Rate' method to calculate its quarterly VAT bill unless:

-Your turnover is more than £150,000 and the other qualifying rules do not apply.
-Your expenditure on standard-rated business expenses is more than HMRC considertypical for your business sector;
-You regularly receive VAT repayments under standard VAT accounting, or
-You make a significant amount of zero-rated or exempt sales.
-Businesses must leave the scheme:
-On the anniversary of joining the scheme if the previous year's VAT-inclusive turnover was more than £230,000;
-If you expect turnover in the next 30 days alone will be more than £230,000;
-If you start to use one of the other special schemes such as one of the margin schemes for second-hand goods, art, antiques and collectibles, the tour operators margin scheme, or the capital goods scheme;
-The business becomes part of a larger group or division or becomes eligible to do so.

Businesses that leave the flat rate scheme are unable to rejoin it for at least 12 months.

Are there disadvantages?

Yes. Sales of second hand vehicles must be included in turnover subject to the flat rate percentage even though no VAT is actually added to the sales price. Input VAT on certain, one-off, large purchases may therefore be lost.

Contact us for more information.

Submitted by MSB Accounting on Friday 2nd September 2011