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Introduction »
VAT Flat Rate Scheme
The flat rate scheme for small businesses was introduced to reduce the administrative burden imposed when operating VAT. Under the scheme a set percentage is applied to the turnover of the business as a one off calculation instead of having to identify and record the VAT on each sale and purchase made. Where the scheme is used this means there is generally no separate claim for input VAT on purchases and expenses.
Under the scheme an eligible business calculates the VAT payment as a flat percentage of VAT inclusive turnover. For this purpose 'turnover' includes all supplies made by the business. The percentage to be used depends on the type of business activity carried on. If the business is newly registered for VAT and also decides to operate this scheme then a further 1% flat rate deduction applies in that first year of registration.
The scheme is generally open to a small business whose annual taxable turnover excluding VAT does not exceed £150,000. Traders must now leave the scheme when their taxable turnover (including VAT) exceeds £230,000. The calculation must be made annually on the anniversary of the business joining the scheme.
Although the business would account for and pay VAT at the flat rate percentage under the scheme, it will still be required to prepare invoices to VAT registered customers showing the normal rate of VAT. This is so that the customer can reclaim input VAT at the appropriate rate.
Example
Cook & Co is a partnership operating a café. The flat rate percentage for this type of activity is 12.5%. Its results for 2012 are as follows:
| VAT inclusive turnover: |
£ |
| Standard rated catering supplies |
73,500 |
| Zero rated takeaway foods |
5,500 |
| Total |
79,000 |
Flat rate VAT would be 12.5%
on £79,000 |
9,875 |
Under normal VAT accounting it would be £73,500 x 20/120 = £12,250 less any input VAT claimed.
Although input VAT cannot be generally claimed, the purchase of capital assets costing more than £2,000 (including VAT) may be dealt with outside the scheme. This means the business can claim input VAT on such items on the VAT return in the normal way. Where each input VAT is reclaimed then VAT will have to be accounted for on a subsequent sale of the asset at the normal rate instead of the flat rate.
Please contact us for a more bespoke review of whether this scheme would be useful for your business.
Introduction »
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