Flat Rate Scheme and Expenses Claimable

The purpose of the below are article is to simplify and explain the Flat Rate Scheme offered to businesses in the UK that meet the eligibility criteria.

Let’s first start with what is a flat rate scheme?

Flat rate scheme

This scheme is designed to simplify administration of VAT by applying a determined percentage to total Gross sales (i.e., Sales Including VAT).

The business will not be able to claim any Input VAT on purchases under this scheme. However, the rate which HMRC will provide will incorporate the element of Input VAT claim in of itself.

In simpler words, if the business pays 20% standard VAT rate, this will be reduced to 12.5% to incorporate the claim of input VAT on purchases based on its business sector.

Example:

Standard Rate

Net Sales Turnover x Rate = Output VAT

Net Purchases x Rate = Input VAT

VAT Payable to HMRC: Output VAT – Input VAT

Flat Rate Scheme

Net Sales Turnover x Rate = Output VAT (20%)

Net Purchases x Rate = Input VAT (20%)

VAT Payable to HMRC:

Total Gross Sale x Flat Rate (12.5%)

HMRC will determine the rate based on the sector that the business operates in.

Those businesses who are identified as “Limited Cost Traders” (i.e., Business whose gross expenditure is Less than 2% of their VAT inclusive turnover or Greater than 2% of their VAT inclusive turnover but less than £1,000 per year) will have a fixed rate of 16.5% applied regardless of sector.

Who can join the scheme?

If the business is interested in joining the VAT Flat Rate Scheme, it can apply to HMRC provided the business meets certain criteria.

The business’s total estimated Vatable sales for the next year must be under £150,000 – this includes everything it plans to sell that is subject to VAT.

Once it joins the scheme it can keep using it until its total business income goes above £230,000 a year.

The Business is not eligible if for a Flat Rate Scheme if:

·        The Business is not registered for VAT

·        it uses the Second-hand Margin Scheme or the auctioneers’ VAT margin scheme

·        The Business is required to use the Tour Operator’s Margin Scheme

·        The Business is required to operate the Capital Goods Scheme for certain capital items

·        The business has stopped using the Flat Rate Scheme in the 12 months before the date of its new application

·        in the 12 months before its application, it has either:

·        accepted a compound penalty offer or been convicted of an offence in connection with VAT

·        been assessed with a penalty for conduct involving dishonesty

·        The Business is, or within the past 24 months have been, registered for VAT in the name of either a:

·        VAT group

·        division

·        The Business is, or within the past 24 months have been, eligible to join an existing VAT group treatment

·        Its business is ‘associated’ with another one in a specified way.

VAT claim on Purchases “The Exception”

As mentioned above, a business is not able to claim any Input VAT paid on purchases under this scheme, because it is incorporated in the rate provided. However, there is an exception to this if it has purchased a capital asset (fixed asset) over £2,000,

For example, Computer Equipment worth £2500. Provided all the capital purchases are on the same receipt such as a PC, printer, and scanner, it can claim the VAT back on these items. It cannot, however, buy a PC one month for £1,500 then a printer the next month for £300 and a scanner the month after for £200 and add them together – they must all be on the same receipt.

Conclusion and Good News

New or small businesses might not have the expertise to account for VAT accurately and by applying for the flat rate scheme the businesses in the UK can save on administration, time and money.

In addition to this, new applicants to this scheme are entitled to deduct a further 1% from the flat rate for the first year the business becomes is VAT registered. The year is noted from when it registers to 12 months later.