Tag Archives: Flat Rate

VAT Flat Rate Scheme – Limited Cost Business

Are you using the VAT Flat Rate Scheme? If so the new rules could affect you!

From the 1st April 2017 HMRC have changed the rules. From this date if you are using the VAT Flat Rate Scheme you have to check for each VAT period to see if you are a ‘Limited Cost Business’.

Depending on whether you fall into or out of the criteria for the given period, will depend on whether you will have to use 16.5% or your normal Flat Rate Scheme percentage. It may be that you will fluctuate between the 16.5% and the normal rate each quarter.

You will be classed as a limited cost business if the amount you spend on relevant goods including VAT is either:

  • less than 2% of your VAT flat rate turnover
  • greater than 2% of your VAT flat rate turnover but less than £1,000 per year, this is time apportioned, if you prepare quarterly returns the amount is £250

For each period you will need to calculate:-

  • your turnover
  • the cost of goods, these are purchases which are exclusively used for business use,

There are some types of expenses which cannot be included in the costs these goods include:-

  • vehicle costs including fuel, (unless you’re operating in the transport sector using your own, or a leased vehicle)
  • food or drink for you or your staff
  • capital expenditure
  • goods for resale, leasing, letting or hiring out if your main business activity doesn’t 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
  • any services

If you’re a limited cost trader this means that you may pay more VAT than you do on standard accounting. If you would like us to check to make sure the Flat Rate Scheme is still appropriate for you or if you would like further advice please get in touch.

VAT Accounting Schemes

Keep it simple

In order to simplify the VAT preparation process, HM Revenue & Customs do allow several alternative VAT accounting schemes for certain business types. If you are eligible, they could save you time and money.

A summary of the main alternative VAT accounting schemes are as follows :

Annual Accounting Scheme

If your estimated VAT taxable turnover for the following 12 months does not exceed £1.35million, you are not part of a group, you have not used the scheme within the last 12 months and you are up to date with your VAT payments then you will be eligible for this scheme.

Instead of completely quarterly VAT Returns, you can complete just one annual Return. Throughout the year, you make interim payments (either 9 monthly or 3 quarterly) based on your previous years actual VAT payments. When you submit your VAT Return, you will then make a balancing payment or receive a balancing refund.

The main benefit of this scheme is to aid with cash flow management.

Cash Accounting Scheme

If your estimated VAT taxable turnover for the following 12 months does not exceed £1.35million and you are up to date with your VAT Returns and payments then you can apply to use this VAT scheme.

Instead of entering items on your VAT Return at the date they have been invoiced, you only enter them at the date they have been paid or received by you. There are some exceptions to this, for example, assets bought on hire purchase or lease purchase must still be entered at the invoice date.

The main benefit is again a cash flow management one, as you only have to pay over output VAT when you have received the cash from the customer. If the customer never pays you, you will never pay over the output VAT.

Flat Rate Scheme

If your VAT taxable turnover is less than £150,000, you are not part of a group and you haven’t used the scheme within the last 24 months then you will be eligible to apply.

Instead of declaring output VAT on your taxable sales and claiming input VAT on your purchases, you can simply pay over a fixed percentage of your total VAT inclusive turnover each quarter. Each business type has a different HMRC approved percentage rate, (e.g. hotels would pay over 10.5% of their total income), but newly VAT registered businesses can reduce the percentage by 1% for the first 12 months. This percentage must be applied to your total sales, which would also include zero-rated and exempt sales. If a large proportion of your sales are zero-rated or exempt, i.e. you do not have to charge VAT on them under the standard VAT rules, then this scheme may not be beneficial for you.

You cannot claim back the input VAT on your purchases with the exception of capital asset purchases with a VAT-inclusive cost of £2,000 or more.

The main benefit of this scheme is to reduce the burden of the paperwork required to complete a standard VAT Return and for some businesses, it could significantly reduce the overall VAT payable to HM Revenue & Customs.

HMRC’s website contains a list of the approved Flat Rate Scheme percentage rates you would have to charge if you changed to the Flat Rate Scheme.

Contact Us

If you think you could benefit from using any of these schemes, or would like any further information, please do not hesitate to contact us and we will be happy to help.