The Flat Rate Scheme
Under normal VAT rules a business pays over to HMRC the difference between the VAT charged on taxable supplies and the input VAT suffered on business purchases. If the VAT suffered is larger than the VAT charged, the difference is reclaimed from HMRC.
To enable business to know how much to pay over to or reclaim from HMRC they need to keep details of both VAT charged and VAT suffered. This can be time consuming.
The flat rate scheme takes a global approach. Instead of working out the difference between output VAT and input VAT, a business operating the flat rate scheme pays a percentage of its taxable turnover for the quarter over to HMRC.
The percentage that is used to calculate the VAT due to HMRC depends on the type of business. The percentages are calculated to give the correct net result for a typical business in that particular sector.
The scheme is open to businesses with estimated VAT taxable turnover of £150,000 or less a year provided that estimated total business turnover is not more than £187,500. However, once a business has joined the scheme, it is allowed to stay in until its total business turnover reaches £225,000 or more. Businesses must register with HMRC to join the scheme.
Joining the scheme has a number of advantages:
- no need to record separately VAT charged on each sale or suffered on each purchase, which saves time (although VAT must still be shown separately on invoices issued to customers);
- a discount of 1% on the flat rate percentage is available for the first year of VAT registration;
- simpler VAT rules apply;
- greater certainty as regards payments due to HMR.
Not Suitable for Everyone!
However the scheme is not right for all businesses and may not be suitable if the business’ purchases are mainly standard rated as the flat rate percentages may result in more VAT being payable than would be payable under the standard rules. Nor is the scheme for businesses that make a lot of zero-rated or exempt sales or which regularly receive a VAT repayment from HMRC.
A range of different flat rate percentages are used under the scheme. Different percentages apply to different business sector. The percentages are published on the HMRC website.
A business using the scheme must choose the flat rate percentage that best corresponds to the nature of its business. Only one percentage can be used, so if a business spans more than one sector, the percentage used should be the one corresponding to the sector from which the greater part of its turnover is derived.
The VAT payable to HMRC is found by simply applying the appropriate flat rate percentage to the flat rate turnover for the relevant quarter.
VAT Change on 1st January 2010
The standard rate of VAT changes from 15% to 17.5% from 1 January 2010. This affects the flat rate percentages. Details of the flat rate percentages applying from 1 December 2008 until 31 December 2009 and those applying from 1 January 2010 are available on the HMRC website.
Businesses using the scheme must use the correct percentage applying at the time. If a VAT quarter spans 31 December, it is necessary to split the quarter into pre 1 January 2010 and post 31 December 2009, work out the VAT due on the turnover for each period and add them together to get the total VAT payable for the quarter.