Flat Rate VAT Scheme Tips and Traps

In our last post we looked at how the Flat Rate VAT Scheme can have some unexpected benefits for small businesses. Rather than just simplifying their accounting, as intended, adopting the Flat Rate Scheme can result in some businesses making more profit by allowing them to keep some of the VAT they would otherwise have paid to HMRC.

Although the Flat Rate Scheme is supposed to be there for simplicity, it has its own set of tips and traps!

Flat Rate Scheme Tips

First year discount

If it is the first year your business has been registered for VAT, then it’s allowed to deduct 1% from its Flat Rate Percentage.

So, if its normal Flat Rate Percentage was 11% for Advertising businesses, say, then 10% would be the percentage applied to its gross sales to determine the amount of VAT to pay to HMRC.

The 1% discount lasts until the day before the anniversary of your VAT registration.

Capital Expenditure

Usually under the Flat Rate Scheme you cannot claim any relief on VAT incurred on items you purchase. This is taken into account as part of the Flat Rate percentage for each trade.

The exception to this is capital expenditure. If you buy a fixed asset that costs more than £2,000 (including VAT) then you can claim that VAT back on your next Return.

There are some catches. The most important one is that the fixed asset must be one purchase.

Bad debts

If you are unlucky enough to have a customer who doesn’t pay you, then under normal VAT accounting if you’ve accounted for the VAT on the sale, you can deduct it from your next VAT Return.

You can also claim relief for bad debts on the Flat Rate Scheme. But you don’t claim the relief at your Flat Rate percentage. You claim relief for the VAT you actually charged on your invoice. Result!

HMRC says this is because “the flat rate includes an allowance for input tax which only occurs if you have been paid by your customer. As you will not have been paid, you will not have had full credit for any input tax.”

Flat Rate Scheme Traps

Getting the right flat rate percentage

You’d think that this wouldn’t be too difficult. But HMRC keeps the list well hidden and apparently some businesses get confused.

In the VAT Notice for the Flat Rate Scheme, HMRC says:

“We will not normally check your choice of sector when we process your application. So if you have made a mistake you may pay too much tax or too little. Paying too little could mean that you are faced with an unexpected VAT bill at a later date.

“However, if we approve you to join the scheme, we will not change your choice of sector retrospectively as long as your choice was reasonable. It will be sensible to keep a record of why you chose your sector in case you need to show us that your choice was reasonable.”

So if there’s any doubt as to the correct trade sector to use (perhaps your business has more than one trade), make sure you keep a note of why you chose the trade sector you used. This will show you have used reasonable care and protect you against the risk of tax geared penalties.

Cash accounting

Lots of small businesses use cash accounting for VAT. This means they account for VAT on their sales and purchases when things are actually paid for, rather than when an invoice is raised. That way they don’t pay the VAT on invoices that haven’t been paid yet by their customers.

The bad news is that you cannot use cash accounting on the Flat Rate Scheme.

However, you can use the Flat Rate Scheme’s own special cash based method. This means that you account for the Flat Rate VAT due on your invoices when the invoices are paid. The proviso is that if HMRC changes the Flat Rate percentages, you use the rate in force when the invoice was paid, not when the invoice was raised.

Will the Flat Rate VAT Scheme work for you?

Despite its quirks, the Flat Rate Scheme can work really well for lots of businesses. At Accountancy Edge, every year we check whether clients whose businesses are eligible for the Flat Rate Scheme would make more profit by joining it. Even if it doesn’t look like it would work for them, they still know we’ve looked out for them!

If you like us to review your VAT affairs, then get in contact with us today.

Would the flat rate VAT scheme work for your business?

When VAT was introduced in the UK, one of its virtues was supposed to be its simplicity. It’s no surprise then that VAT turned into one of the most complicated taxes that business owners have to deal with.

So HMRC did something uncharacteristic. They introduced a VAT scheme designed to make things simpler for smaller businesses.

The Flat Rate VAT Scheme

The Flat Rate Scheme was meant to make record keeping easier for smaller businesses.

You charge VAT on your sales in the normal way, but there’s no need to keep track of VAT on your purchases. Instead you just need to know your VAT inclusive sales figure (and any VAT on assets you bought that cost more than £2,000).

You take your VAT inclusive sales figure for the quarter and multiply it by the flat rate percentage HMRC provides for your trade sector, and that’s the VAT you have to pay.

An unexpected upside

For some businesses the simplicity of the scheme isn’t the main benefit.

Quite often the amount of VAT the company would pay to HMRC under the Flat Rate scheme is a lot lower than what they would pay under standard VAT cash accounting.

So what happens to the difference? It’s extra profit for your business.

At Accountancy Edge, we check all of our eligible VAT registered clients each year to see if the scheme would work for them. In the last few months we’ve identified several businesses that have been more than £4,000 a year better off just by changing VAT scheme.

And that’s not just a one off. Your business can benefit every year.

So, who is eligible?

Your business can join the Flat Rate Scheme if in the next year your VAT exclusive turnover is likely to be less than £150,000.

Would it be right for your business?

If you’re interested in finding out, then why not get in contact with us?

We can look at our last four VAT returns and tell you whether the Flat Rate Scheme would work for your business. If it would work for you, we’ll also tell you how much extra profit you could make just by changing VAT scheme.

Pasty tax too hot to swallow

“Backdown on Pasty VAT. I feel such a fool for hoarding all those hot pasties now.” – Graeme Garden

Budget 2012 promised that all takeaway food sold above ambient temperature would be subject to VAT at the standard rate.

This was aimed at some bakers and supermarkets who had been selling hot pasties, pies and rotisserie chickens with VAT applied at the zero rate. They argued the goods weren’t sold hot for consumption, but rather for presentational or health and safety purposes.

Predictably there was an outcry. A tabloid newspaper even hired an actress dressed as Marie Antoinette to follow Mr Osborne around.

So he changed his mind.

Pasties and other bakery items will no longer attract VAT if they are “cooling down” after being removed from the oven.

That leaves the rotisserie chicken as the major casualty of fiasco.

Static caravan in u-turn saga

Now that’s not something you see every day: a static caravan involved in a u-turn.

Budget 2012 proposed introducing VAT at the standard rate of 20% to the supply of static caravans from October 2012.

Static caravans are currently zero rated for VAT, with only their fixtures and fittings being subject to the standard rate.

Predictably the holiday industry didn’t like the idea of charging their largely non-VAT registered customers 20% VAT and kicked up a stink.

Then the static caravan was involved in a u-turn.

George Osborne said that plans to tax static caravans at 20% will be altered. They will now attract VAT at a reduced rate of 5% from next April. Unless he changes his mind again.

VAT changes – caravans

At present, sales of touring caravans, static caravans and holiday lodges are zero-rated for VAT purposes. The only items that are part of their sale that are taxable at the standard rate of VAT are the white good.

This is changing from 1 October. From that date sales of holiday and leisure caravans will be subject to standard rate VAT.

Residential caravans (aka ‘park homes’) designed and constructed for year-round living will continue to be zero-rated for VAT.

If your business sells static caravans the terms of occupancy will now be important when determining the VAT treatment. A static caravan on a holiday park with only 10 months available occupancy will have to be standard rated.

If you sell caravans, whether new or second hand, you should contact us to discuss your pricing structure and available VAT schemes.

VAT traps – the time of supply

The recent case of Bromley Emergency Training and Developments Ltd (TC1728) highlights how important it is to get the time of supply right for your business.

This company invoiced for training courses in advance. They didn’t do the work at that point though, so they accounted for the supply when the courses took place. HM Revenue & Customs had a different view. They said issuing a VAT invoice was the point of supply.

The result was that by treating the supply as the date payment was received it meant that the effective date for VAT Registration was breached earlier than thought. Penalties soon followed!

With a simple change to the way the company did things this could have been avoided.

If you’re concerned about the timing of transactions for VAT purposes and want to make sure you’re doing things right, then give us a call.

Flat Rate VAT Scheme Tips and Traps

Flat Rate Scheme Tips

First year discount

Capital Expenditure

Bad debts

Flat Rate Scheme Traps

Getting the right flat rate percentage

Cash accounting

Will the Flat Rate VAT Scheme work for you?

Would the flat rate VAT scheme work for your business?

The Flat Rate VAT Scheme

An unexpected upside

So, who is eligible?

Would it be right for your business?

Pasty tax too hot to swallow

Static caravan in u-turn saga

VAT changes – caravans

VAT traps – the time of supply

Recent Articles

Key Services

Archives

Accountancy Services

Business Services

Responsibility

More Info

Accountancy Edge