In his 2004 Budget the Chancellor made several changes to the VAT flat rate scheme to make it more attractive to small businesses.
The scheme allows those registered for VAT to pay VAT as a percentage of their turnover instead of having to work out the VAT individually on their sales and purchases. Customs and Excise in their leaflet on the scheme state that this can help in the following ways.
· Easier record keeping – there is no need to separate out the gross, VAT and net figures in the accounting records.
· Fewer rules to follow – there are therefore no problems relating to what input tax can be claimed and therefore less chance of mistakes being made.
The scheme is available to anyone who expects their taxable turnover in the next 12 months to be not more than £150,000 (excluding VAT) or their total turnover to be not more than £187,500 (excluding VAT). Taxable turnover means the value of sales at the standard, reduced and zero rates of VAT. Total turnover means taxable turnover plus any exempt and non business income.
The flat rate applicable to a business is set out in the Ready Reckoner produced by Customs & Excise. This includes rates from 2% for shops selling food, confectionary, tobacco, newspapers or children’s clothing to 13.5% for labour only building or construction services. The Ready Reckoner can be found in the flat rate section of Customs & Excise Website which can be accessed via the links section of our site. You will see that Accountancy is almost at the top end of the scale at a flat rate of 13%!
When you apply to join the scheme you decide which of the trade sections best describes your business. If Customs & Excise approve your application they will not change your trade sector as long as your choice of sector was reasonable and you have kept a record of why you chose it. So make sure you can justify your choice of sector if it is not obvious.
Once you have been approved you will then work out the VAT you pay on each Return by multiplying your VAT inclusive turnover for the accounting period by your flat rate percentage. Remember the VAT inclusive turnover for this calculation includes all the supplies you make, both taxable at standard, reduced and zero rated and exempt.
Although anyone registered for the flat rate scheme calculates the VAT payable to Customs & Excise by reference to the percentage applicable to their business any invoices they issue must show the correct rate of VAT for what is supplied not the flat rate.
In his Budget the Chancellor lowered most of the rates used in the scheme in order to make it more attractive. He also introduced a further reduction of 1% for anyone who registers for the scheme in their first year of VAT registration. Note this is the first year of VAT registration and not first year of registering for the flat rate scheme.
As has already been explained by using the flat rate scheme there is normally nothing to claim back for VAT paid to suppliers. There are, however, two exceptions to this rule. You can make a claim for VAT that was charged before the business was registered for VAT and also for VAT paid on any single capital asset costing £2000 or more including VAT.
So does it make sense to join the scheme? As always the answer is “it depends”. The scheme obviously does reduce the amount of effort required to complete a VAT Return and does substantially reduce the risk of Customs finding errors. If, however, your business has a substantial amount of zero rated or exempt sales then unless you qualify for one of the very low rates it probably means that you should not join the scheme. An example of this would be a Management Consultancy business most of whose customers were overseas. Under the flat rate scheme they would still pay 12.5% of their sales whereas under the normal scheme these would be zero rated.
We would be happy to help you decide whether or not joining the flat rate scheme would be beneficial for your business. If you would like to discuss this or any other aspect of your business please contact us. As always we will be delighted to help.
Clive Jones – Clifford Towers, Chartered Accountants
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