SIMPLIFY YOUR VAT AFFAIRS - The flat rate VAT scheme is an incentive to help simplify taxes and means you charge VAT on your invoices at 20%, but only pay HM Revenue & Customs at a lower rate depending on your profession/trade (see table below).
The flat rate scheme is recommended for businesses that have very few VAT chargeable purchases and expenses i.e. limited purchases of stock, services etc.
The key eligibility condition for the scheme is that the business’s estimated annual turnover, excluding VAT, is below £150,000.
Companies on the flat rate scheme are unable to claim back any VAT on purchased goods and expenses for their business. You can however reclaim VAT on capital assets purchased over £2,000, for example a PC. Providing all the capital purchases are on the same receipt such as a PC, printer and screen you can claim the VAT back on all these items. You cannot however buy a PC one month for £1,500 then a printer the next month for £300 and the screen the month after for £200 and add them together; they must all be on the same receipt.
Like standard VAT, the flat rate scheme still requires you to complete a quarterly VAT return form (online only). You will need to charge the standard VAT rate, currently 20% on your invoices. However, rather than accounting for the VAT on every payment, when you do your quarterly report you will only pay a single flat rate percentage of your turnover for each quarter.
The VAT percentage you pay is considerably lower than that of the standard VAT rate and you keep the difference as your profit. See table below for a full list of the standard rates dependant on your profession (you can reduce the % by 1 in the first year of trading).
If you are using the cash-based turnover method, which allows you to account for your VAT liability when you receive payment, you just need to make sure your flat rate percentage is the rate that was in place at the time of supply and not the rate that is in place when payment is received.
Example a limited company specialising in IT:
Net amount you invoice your client£ £5,000
VAT charged to client at 20% £1,000
Gross Amount £6,000
Flat rate VAT – 13.5%
VAT to be paid to HMRC
(13.5% of £6,000) £810
VAT received from client £1,000
In addition to the ability to earn money from VAT, the level of paperwork is reduced as you are submitting only your input costs (VAT charged) to HMRC. All that is required is that you keep the receipts for your purchases.
If you buy lots of stock or have a level of high VAT chargeable expenses it is unlikely the scheme is beneficial for you. Alternative VAT schemes which may be of benefit to could be either the annual accounting scheme or cash accounting.
Using annual VAT accounting, you make nine monthly or three quarterly interim payments throughout the year and are only required to complete one VAT Return at the end of the year when you either make a balancing payment or receive a balancing refund.
The cash accounting scheme, unlike standard VAT accounting where VAT is due when you
issue an invoice, you don’t have to pay VAT until your customers pay you.
|Further details on these two schemes can be provided on request.|
|Category of Business Appropriate Percentage|
|Accountancy or book-keeping||14.5|
|Any other activity not listed elsewhere||12|
|Architect, civil and structural engineer or surveyor||14.5|
|Boarding or care of animals||12|
|Business services that are not listed elsewhere||12|
|Catering services including restaurants and takeaways||12.5|
|Computer and IT consultancy or data processing||14.5|
|Computer repair services||10.5|
|Dealing in waste or scrap||10.5|
|Entertainment or journalism||12.5|
|Estate agency or property management services||12|
|Farming or agriculture that is not listed elsewhere||6.5|
|Film, radio, television or video production||13|
|Forestry or fishing||10.5|
|General building or construction services||9.5|
|Hairdressing or other beauty treatment services||13|
|Hiring or renting goods||9.5|
|Hotel or accommodation||10.5|
|Investigation or security||12|
|Labour-only building or construction services||14.5|
|Laundry or dry-cleaning services||12|
|Lawyer or legal services||14.5|
|Library, archive, museum or other cultural activity||9.5|
|Manufacturing fabricated metal products||10.5|
|Manufacturing that is not listed elsewhere||9.5|
|Manufacturing yarn, textiles or clothing||9|
|Mining or quarrying||10|
|Real estate activity not listed elsewhere||14|
|Repairing personal or household goods||10|
|Retailing food, confectionary, tobacco, newspapers or children’s clothing||4|
|Retailing pharmaceuticals, medical goods, cosmetics or toiletries||8|
|Retailing that is not listed elsewhere||7.5|
|Retailing vehicles or fuel||6.5|
|Sport or recreation||8.5|
|Transport or storage, including couriers, freight, removals and taxis||10|
|Wholesaling agricultural products||8|
|Wholesaling that is not listed elsewhere||8.5|
If you wish to discuss the flat rate scheme in more detail and whether it is appropriate for your business, please do not hesitate to contact Harbour Key Limited at firstname.lastname@example.org or 01452 713277.