Could the flat rate scheme for VAT save you time, money or both?
The flat rate scheme is a simplified VAT accounting scheme which is available to businesses whose revenues do not exceed £150,000 per year.
Businesses charge VAT in the normal way, but when it comes to preparing the VAT return and paying VAT, the total turnover is multiplied by a percentage, and that amount is simply reported to HMRC, and paid over.
This method does not take account of VAT on purchases by the business, aside from where capital assets are bought for more than £2,000. This means VAT on larger purchases can sometimes be reclaimed.
The percentage used comes from a list of business types set by HMRC, based on their expectations of what a typical VAT payment from a business of that type would come out at. There is a bonus of a 1% reduction in the rate in the first year of registration, which can make any gain greater.
It is clear to see that time that can be saved by employing this scheme. Rather than tracking each individual amount of VAT that can be claimed, a flat fee is paid. This is great for forecasting a VAT bill mid-quarter, as you can simply tot-up your sales and calculate, a real comfort for some and aiding those who like to save as they go.
From a money-saving perspective, it is possible for a business to make a financial gain from being on the scheme. If multiplying the industry percentage by the turnover gives a lower VAT figure than the normal method, then the business takes that gain. By the same token, a business could lose out of the reverse is true.
The use of the scheme in order to create a financial benefit has been restricted by new conditions relating to the percentage used, introduced in April 2017, for 'limited cost traders'. HMRC tackled those who have limited physical expenses by overriding their percentage with a high 16.5% rate, at which only a very small gain is possible, and in many cases leaves the business slightly worse off.
An advertising agency has sales of £12,000, including £2,000 VAT charged in a quarter. It has purchases of £7,000, including £500 of VAT paid.
Standard method: £2,000 - £500 = £1,500 due
Flat rate method: £12,000 x 11% = £1,320 due
A saving of around £720 per year, and an easier VAT life!
Business owners should be very cautious around joining or leaving the flat rate scheme, and take the expert advice of an accountant when making the switch. Businesses which are changing in nature or size, don't buy many goods, or make a mix of supplies at different VAT rates should be especially careful. Eligibility should also be carefully considered with particular attention to the exceptions.
If you are a business with under £150,000 turnover, then we can quickly check whether the flat rate scheme would work for you. HMRC rarely create an opportunity to save time, or money - so let's take it if we can!