VAT Flat Rate Scheme - are you a winner or loser?
In the last few weeks I have seen two businesses that have been using the VAT flat rate scheme that would be far better off outside the scheme. Why is this? The flat rate scheme is a simplification introduced by HMRC to help small businesses account for VAT more simply. However as a simplification, it is not the best route for every business.
The flat rate scheme is available to businesses with a turnover of £150,000 per year or less and they can stay in the scheme until their turnover hits £230,000 per year. The idea is that instead of adding all the output tax charged on sales in a VAT return period and deducting all the input tax incurred on purchases to get to a liability to be paid or reclaimed from HMRC, the business instead applies a flat rate percentage to its VAT inclusive sales each quarter and this is the amount of VAT payable to HMRC. The business cannot recover any input VAT – the flat rate percentage makes an allowance for that. The percentage to be paid varies according to the trade category of the business.
Businesses that decide to use the flat rate scheme should only do so after very careful comparison of their likely VAT position in the scheme compared to outside the scheme. Use actual projected sales and purchase figures to make the calculations and my advice is to redo the calculations every time you submit a VAT return to check that you are not overpaying by being in the scheme. Your accounting package probably prepares a normal VAT return for you in any case so you are unlikely to be saving much time by being in the flat rate scheme.
In general though the scheme is unlikely to benefit your business if:
• A high proportion of your sales are zero rated, exempt or to overseas customers – you will end up paying VAT on sales where no VAT has actually been charged to the customer
• You incur input tax on purchases because under the scheme, you cannot recover this input VAT
As always, the rules are complex! Although HMRC have the discretion to allow a business to leave the scheme with effect from a date in the past if you find that you are worse off in the scheme, they don’t often allow it earlier than the previous VAT period so you need to keep on top of checking whether it is a good deal for your business or not.
If you would like help with a VAT Flat Rate Scheme issue or any other VAT issue please contact Sue Rathmell, VAT Director at MHA MacIntyre Hudson.