VAT Flat Rate Scheme

When it was announced in November 2016 that the VAT Flat Rate Scheme was changing, many businesses moved across to standard VAT accounting. But is it worth considering whether the Flat Rate Scheme is better for your business?

Benefits of using the Flat Rate Scheme include:

• Time-savings, as you don’t need to record VAT paid on all your outgoings, and there are fewer rules to follow
• For businesses in their first year of VAT registration, a 1% discount can be applied to your flat rate percentage
• As it is easier to calculate your VAT position, mistakes are less likely, and you will have more clarity over upcoming VAT bills

However, there are some potential disadvantages to consider, such as:

• The limited cost trader rate of 16.5% may apply in some periods (see below)
• If your business mostly purchases standard rated items, you won’t be able to reclaim the VAT on these
• If your business is regularly receiving VAT refunds, then the Flat Rate Scheme won’t work for you
• If your business makes a lot of zero-rated or exempt sales, the flat rate percentages take into account these kinds of sales

The changes brought into effect 1 April 2017 affected businesses considered as “limited cost traders”, where VAT inclusive expenditure on goods is either:

• Less than 2% of their VAT inclusive turnover in a prescribed accounting period
• Greater than 2% of their VAT inclusive turnover but less than £1,000 p.a. if the prescribed accounting period is one year (proportioned accordingly if not one year)

The 2% calculation must only include goods used exclusively for the purpose of your business (i.e. with no private use element).

Spending on services does not count, and the rules also exclude expenditure on capital purchases, motor expenses and food and drink.

Further exclusions include goods for resale, leasing or hiring out if your main business activity does not ordinarily consist of selling, leasing, letting or hiring out such goods; goods that you intend to re-sell or hire out, unless selling or hiring is your main business activity.

If the business is considered a limited cost trader, a rate of 16.5% on VAT inclusive turnover is applicable.

Guidance on which flat rate applies to your business can be found here.

In order to determine what rate applies, actual expenditure on goods for each VAT period needs to be reviewed each time a VAT return is completed.

Therefore, there may be periods where the business applies the VAT Flat Rate for the business type and some where the limited cost trader rate applies.

Newly registered businesses within the first 12 months of VAT registration are still be able to claim the 1% discount, therefore a rate of 15.5% may apply.

HMRC have created a calculator to help determine the correct rate to apply to the VAT period, which is available here.

For more help on this please don’t hesitate to get in touch.