WHAT IS FLAT RATE VAT SCHEME?
Under a Flat Rate Vat Scheme, a business entity will pay a fixed percentage of annual turnovers as VAT. There would be no need to go through lengthy complicated calculations. The VAT flat rate has specifically been designed to make VAT returns simpler for small businesses and reduce paperwork for them. Any business opting for Flat Rate VAT scheme will not be able to reclaim input VAT on purchases; however. Only Purchases of Capital Assets worth more than £2000 will be eligible for VAT reclaim under this scheme.
WHAT ARE BENEFITS OF CHOOSING FLAT RATE VAT SCHEME?
There are essentially three major benefits of opting for Flat Rate VAT scheme:
- It reduces the burden of keeping detailed records of sales and invoices. It simplifies overall record keeping for small businesses.
- Flat rate VAT scheme charges lower than the standard VAT rate UKe. 20%
- It is instrumental to cash flow management as businesses would know what amount they are expected to pay.
The Flat Rate VAT scheme will not be beneficial if:
- Your business is involved in cross border sale and purchase of goods and services. Choosing Flat Rate Scheme will make VAT process to complex.
- Your business usually reclaims input VAT
- If your customers are VAT registered and you have to issue most of VAT invoices in normal way.
WHO CAN OPT FOR FLAT RATE VAT SCHEME?
This scheme is only for small businesses having turnover not above than £150,000 per annum exclusive of VAT. You need to be VAT registered before you can apply for this scheme. There are additionally some restrictions for ‘closely associated’ businesses joining this scheme. Your business will be closely associated with another business if:
- One of you is dominantly influential on the other
- Both of the businesses are bound by financial, economical and organizational link so that the other business has authority to give you directions
- You comply with directions of the other business practically even though there is no legal compulsion for that. Commercial reality will supersede the legal form.
You will have to write specially to HMRC confirming that there is no risk to your revenue if you are not closely associated with any other business at the time of applying but have been in last two years. You can use VAT Helpline if you want to determine if you are closely associated with any other business.
You can combine Flat Rate VAT scheme with Annual Accounting Scheme to file only one single VAT returns each year. However, Flat Rates will not work for businesses already on Cash Accounting scheme, retail schemes and Margin Schemes for Second hand Goods.
HOW TO FORECAST FUTURE TURNOVER FOR FLAT RATE VAT SCHEME?
HMRC will accept any reasonable grounds that you may use to forecast your annual turnover. It will not penalize you if you used reasonable grounds but your annual turnover was more than the £150,000 benchmark. Always keep your annual turnover forecast records safe with you in case HMRC asks you on what basis you relied for your turnover forecasts.
If total income increases above £230,000, you will cease to be eligible immediately. However, if HMRC thinks your next 12 months income will remain below £191,500, you may still remain in the scheme. Both these figures are inclusive of VAT of all taxable and exempt supplies.
WHAT IS VAT RATE UNDER FLAT RATE SCHEME?
Under this scheme, VAT calculation is fairly simple. For example if you have a VAT rate of 10% and a VAT inclusive turnover of £20,000, your VAT would be £20,000 (10% of 20,000). Your flat rate will depend on what business you are doing and how much you spend on goods. You will get 1% discount in first year of VAT registration, regardless of business type.
For businesses that spend a small amount on goods, there is a higher flat rate of 16.5%. These businesses are classified as “limited cost traders’ or ‘limited cost businesses’. The criteria for such business are that they spend either less than 2% of their turnover on goods or less than £1000 on goods. If you spend less than £1000 which is greater than 2% of your turnover, you are still a limited cost business. Make sure you do not include purchase of capital goods, foods and drinks, vehicles and parts (unless you are running a vehicle hiring business) in your purchases.
For businesses that are not categorized as limited cost traders, flat rate will vary depending on type of business. HMRC has a long list of business types and their corresponding VAT flat rates. If you cannot find your business type in the list, you can contact the VAT Helpline.
HOW TO REGISTER FOR FLAT RATE VAT SCHEME?
You need to register for VAT flat rate scheme and you need to be registered for VAT first. You can apply for flat rate scheme by post, online or by email or phone.
- Online Application: you need to fill in the online form VAT600FRS
- For Post, you need to download the form, print it, fill and then post it to HM Revenue & Customs, National Registration Unit, Imperial House, 77 Victoria Street, Grimsby, DN31 1DB.
- For email, you need to download the form, fill it and attach it in email to firstname.lastname@example.org
- For Phone you need to call VAT Helpline
WHAT INFORMATION DO YOU NEED TO APPLY FOR FLAT RATE VAT SCHEME?
Make sure you have following on hand when you apply:
- Business Name
- Business Address (Mention whether UK based or non UK Based)
- Telephone Number
- VAT registration Number
- Business Activity type and details
- Flat Rate you will use
- The date when you will like the scheme to start being applied to you.
HMRC will always notify you in writing when your application is successful.
FINAL WORDS- FLAT RATE OR NO FLAT RATE:
Your final decision should depend on the following things:
- What is your business activity and the corresponding flat rate. Remember VAT Rate UK 2019 is 20%
- What are your VATable inputs and outputs?
- When can you be expected to achieve revenue above flat rate benchmark
- Do you earn any “exempt incomes”
If you are confused about any aspect of Flat Rate Vat Scheme, or would like to know if it is beneficial for you or not, you can Contact Certax Fitzrovia. We are experienced tax consultancy firm servicing in London and across UK.