Overview of VAT Flat Rate Scheme
VAT Flat Rate Scheme is an incentive provided by the HMRC to help simplify taxes and is used by the small businesses to work out how much VAT they have pay to the HMRC for each quarter. VAT Flat Rate Scheme, also abbreviated to VAT Flat Rate Scheme, is designed to save time of small businesses, rather than cash and is designed to simplify the VAT return process, especially for the small businesses. The HMRC has introduced this innovative way of paying VAT to ensure that the businesses covered under the Flat Rate Scheme continue paying approximately the same amount of VAT but with a much lesser paperwork as compared to other active VAT schemes in the United Kingdom. VAT Flat Rate Scheme will affect businesses such as firms providing services that spend very less on goods including raw materials
As per the VAT Flat Rate Scheme, you will charge VAT to your customers in the way you use to do in standard accounting, however you pay a percentage of your annual turnover to the HMRC as VAT, where the percentage you pay to the HRMC varies from business to business because that depends on the type of business you are in, unless you are a limited cost trader and like it is mentioned above that the VAT Flat Rate Scheme is designed to save time of the small business rather than cash, the percentage vary as per your business trade, unless you are a limited cost trader
. As per the guidelines of HMRC, you are eligible to join the VAT Flat Rate Scheme only if your turnover is £15,000 or less.
The main intention behind the introduction of VAT Flat Rate Scheme was to save the small businesses from detailed paperwork and thus it helps in simplifying the record keeping process of an eligible business. It also makes it simple and easy to calculate the VAT for a particular type of business.
VAT Flat Rate Scheme implies the following:
- You have to pay a fixed rate of VAT to HMRC.
- You are entitled to keep the differences between what you pay to HMRC and what you charge your customers.
- You can reclaim VAT on your purchases only if your capital assets are over £2,000.
HMRC has kept the working principle of VAT Flat Rate Scheme quite simple and has combined both the steps of standard accounting into one, for example:
If you as a owner of a cloth shop are selling a dress for £120 (VAT included), under the VAT Flat Rate Scheme, he will be paying a flat rate of VAT to HMRC i.e. £120 * 7.5 = £9 (Under the Flat Rate Scheme, the flat rate percentage for a cloth shop is 7.5%)
Some of the important key points about the VAT Flat Rate Scheme are as below:
- You should not join the scheme if your annual turnover is either equal to or less than £150,000 in the first year of business operation.
- If you have already joined the scheme but your annual turnover has exceeded £230,000 (inclusive of VAT), then you must exit from the scheme immediately.
- If you are a part of VAT Flat Rate Scheme, then you will not be able to claim any VAT on purchases made on goods and expenses, if it is under £1500. If the purchases made on the goods and expenses are more than £2000, then you have to ensure that all the capital purchases are on the same receipt.
- Fixed rate percentages are lower than the standard rate.
Advantages & Disadvantages of VAT Flat Rate Scheme
VAT Flat Rate Scheme has its own share of advantages and disadvantages, such as:
Advantages of VAT Flat Rate Scheme
- As a part of the scheme, you have to handle less amount of paperwork, because under VAT Flat Rate Scheme you are not required to submit any of your input costs to HMRC. However you do require to keep a record of all the receipts from the purchases.
- If you are using the VAT Flat Rate Scheme for the first time and if you happen to be in the first year of your business, you are entitled for getting an extra deduction of 1% in the overall percentage of tax that you are paying for each quarter.
- Under the VAT Flat Rate Scheme, you can earn some extra money out of VAT.
Disadvantages of VAT Flat Rate Scheme
However, the scheme has its own share of disadvantage, that is:
In case you are buying lots of stock or have high VAT chargeable expenses, you are not eligible to reclaim VAT.
Eligibility to join VAT Flat Rate Scheme
As mentioned above, HMRC has introduced VAT Flat Rate Scheme to help small business mainly with time by reducing the amount of paperwork they had to do earlier with the standard accounting, however they have also kept a filter and businesses have to qualify to be a part of the scheme.
As per the eligibility criteria of HMRC, you can join the scheme only if:
- Your business is already VAT registered; and
- Your annual turnover is equal to or less than £150,000
And, if you fall in one of the following criteria, then you are not eligible to join the VAT Flat Rate Scheme:
- If you were earlier the part of scheme, but left it in the last 12 months.
- If you have joined or were eligible to join a VAT group in the last 24 months.
- If your one business is closely associated with another business.
- If you have already joined a margin or capital goods VAT scheme.
- If you have committed a VAT offense such as VAT evasion in the last 12 months.
- If you registered for VAT as a business division in the last 24 months.
How to join VAT Flat Rate Scheme
If your business fits into the eligibility criteria of VAT Flat Rate Scheme, then you can join the scheme as per the steps mentioned below:
- One of the easiest and quickest way to register under the scheme is to register online and most businesses use online registration method, including partnerships. HMRC gives you the option to either register on the website either by yourself or by appointing an agent, who will register and submit your VAT returns on your behalf.
- You can also use the conventional method i.e. sending your registration form by post and if that’s the case, then you have to fill in VAT600FRS and post it to the address mentioned on the form. You can also use VAT600 AA/FRS form, if you want to apply for the Annual Accounting Scheme at the same time.
Once you have done the needful you have to wait till the time your registration gets through. As a part of the procedure, HMRC will go through your form and once they are verified, they will send you confirmation through your VAT online account (if you have registered online) or by post. However, before you start your registration process, you must run through the eligibility checklist of HMRC to see if your business fits into the eligibility criteria of VAT Flat Rate Scheme.
How to Leave VAT Flat Rate Scheme
HMRC has kept an exit option for those who either don’t want to be a part of the scheme anymore and for those who are no longer eligible to be a part of the scheme. Irrespective of the reason of your leaving the scheme, you have to write to HMRC regarding the same and send it to their postal address, i.e.
HM Revenue and Customs
77 Victoria Street
Once your letter of exit is received by the HMRC, they will confirm the same by giving you a leaving date, post which you are not a member of the scheme and thus cannot avail any of its benefits. Life is strange and if you wish to rejoin the scheme at some point of your life, you got to wait for 12 months before you can rejoin the VAT Flat Rate Scheme.
Work Out Your Flat Rate
In order to work out your Flat Rate, you must have to identify the business sector that your belong to and in order to do so, you have to look for the sector that seems closest to your business. For example, if your business is a limited cost business, then your flat rate percentage will be 16.5% irrespective of the sector. It is quite easy to determine your sector because HMRC hasn’t described the sectors in technical terms, but has rather used plain English and thus if you find a match or even a close fit, you can use the sector and the flat rate percentage applicable to that particular sector. While you try to find a matching sector for your business, you must ensure that your business is not mentioned in the composite sectors, i.e. sectors referring to more than one business type.