Flat rate VAT is becoming more and more popular with small businesses around the country, it is right to explore this further to see how this would benefit you and your business.

Firstly who can join the Flat Rate Scheme?

If your estimated VAT taxable turnover, excluding VAT in the next year will be £150,000 or less, you can join. Your VAT taxable turnover is the total of everything that you sell during the year that is liable for VAT. It includes standard, reduced rate or zero rate sales or other supplies. It excludes the actual VAT that you charge, VAT exempt sales and the sale of any capital assets.

Generally you don’t reclaim any of the VAT that you pay on purchases, although you may be able to claim back the VAT on capital assets worth more than £2,000. Once you join the scheme you can stay in it until your total business income is more than £225,000. This threshold will be increased with effect from 4 January 2011 to reflect the increase in the standard rate of VAT to 20 per cent.

 You cannot join the flat rate scheme however, if:

•  You were in the scheme and left during the previous 12 months.
• You are, or have been within the previous 24 months, registered for VAT as the division of a larger business, or as part of a group, or you are eligible to do so.
• You use one of the Margin Schemes for second-hand goods, art, antiques and collectibles, the Tour Operators’ Margin Scheme, or the Capital Goods Scheme.
• You have been convicted of a VAT offence or charged a penalty for VAT evasion in the last year.
• Your business is closely associated with another business.

 How is it calculated?

The flat rate scheme involves calculating the VAT payable to HM Revenue and Customs each quarter as a flat percentage of your gross turnover (gross turnover broadly includes all sales, inclusive of VAT, and business bank interest received), as opposed to the traditional method of deducting the VAT paid on your purchases from the VAT charged on your sales. The percentage applicable depends on the type of business.

Whether the flat rat scheme will benefit your particular business depends on a number of factors, including the VAT status of the items you currently buy and sell and the flat rate percentage that would be applicable to you.                               

Remember you will still charge VAT to your customers on VAT-able sales at the applicable rate, currently 17.5% for standard rated items.

 Looking at an example

With net annual turnover of £50,000 and purchases of £2,000 on which VAT was paid of £298, the following would be an example of using the flat rate of 12.5% (management consultancy):

 -       £50,000 + VAT = £58,750

 £58,750 x 12.5% = £7,343.75 VAT payable to HMRC

 Amount payable to HMRC if not on flat rate = 8,750 – 298 = £8,452 VAT payable to HMRC

 Yearly gain by joining the flat rate scheme = £1,108.25

As well as considering the VAT implications of joining the scheme there is also an impact on corporation tax. This is because calculation of the turnover of your business will increase, however this will be counteracted to some extent by the inclusion of your business expenses gross instead of net of VAT in your accounts. If we take the above example the additional corporation tax payable under the flat rate scheme would be:-

 -       Turnover for flat rate = £58,750 – £7,343.75 = £51,406.25

 Less expenses for flat rate = £51,406.25 – £2,000 = £49,406.25

 Multiplied by 21% corporation tax rate = £49,406.25 x 21% = £10,375.31 corporation tax

 -       Turnover for non flat rate = £50,000

 Less expenses for non flat rate = £50,000 – £1,702 = £48,298

 Multiplied by 21% corporation tax rate = £48,298 x 21% = £10,142.58

 Additional corporation tax under flat rate would be £232.73

 Therefore the overall effect for applying for the flat rate scheme would be a saving of £875.52

 Please contact me for a real example of how using the flat rate scheme would affect your business.

 What are the benefits?

Using the Flat Rate Scheme can save you time and smooth your cash flow. It offers these benefits:

•  You don’t have to record the VAT that you charge on every sale and purchase, as you would with standard VAT accounting. This can mean you spend less time on the books, and more time on your business. You do need to show VAT separately on your invoices, just as you do for normal VAT accounting.
• A first year discount. If you are in your first year of VAT registration you get a one per cent reduction in your flat rate percentage until the day before the first anniversary you become VAT registered.
• Fewer rules to follow. You no longer have to work out what VAT on purchases you can and can’t reclaim.
• Peace of mind. With less chance of mistakes, you have fewer worries about getting your VAT right.
• Certainty. You always know what percentage of your takings you will have to pay to HMRC.
• There is often effectively a cash positive position when comparing flat rate VAT calculations to standard VAT.

 Please do contact me if you are interested in applying to join the scheme or just want some further information.

As I am sure everyone is aware, the main rate of VAT increases to 20%, the question of how may it affect you will also be important

For those businesses who operate under that flat rate scheme the government have released a budget note with the new rates shown under the usual generic categories.

Due to the nature of a large proportion of the contractor freelance market this will in some ways be good news. With the main rate increasing by 2.5% a similar increase could be expected on the flat rates. Looking at the tale this is not the case, with the increase for sector relevant categories only increasing by 1.5% this leads to an effective benefit of 1% making the decision of whether to register for VAT under flat rate an even easier one.

Other than the changes in percentages the principles are as they are at the moment, I would suspect the result form an administration point of view would be no change from the current calculations for the quarterly VAT returns.

I have attached the budget note below and hope it will be useful for those who have questions on the subject, it is only three pages long and should make easy reading!

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The Professional Contractors Group (PCG) PCG and other have welcomed the launch of the Office of Tax Simplification (OTS) announced by the Exchequer Minister David Gauke MP at the Treasury on Tuesday 20th July.

 The OTS is made up of independent experts and will make recommendations to Government on simplifying the tax system.  The setting up of this body had been promised in the Budget and PCG is delighted that the Government has been so prompt in making good on this commitment.

 The OTS, as part of their review into small business taxation, will be tasked with identifying fairer alternatives to IR35.

IR35 was introduced by the last Government as a so-called anti-avoidance measure; however it has been widely condemned by the freelance and contracting community for its extraordinary complexity and unfairness.  The PCG in particular was originally formed as a response to IR35 and has campaigned hard on this issue ever since.