Choosing the VAT Flat Rate scheme as a business owner may mean a simpler route for calculating, paying and recouping VAT in your business, where you pay a fixed rate of VAT and you get to keep the difference between what you charge to customers and what you pay to HMRC. There is therefore little need to monitor your VAT position on an ongoing basis as you always know what VAT you are due to pay and you could be left cash flow positive if you have a bumper level of sales in a given period.
So what circumstances would you no longer consider using the VAT Flat Rate Scheme (FRS)? There are a number of rules to consider which may cause you to reconsider your VAT position.
The turnover rule
If you are currently in the FRS and you are aware that your turnover in the last 12 months was more than £230,000 including VAT or if you forecast it will be at this level in the next 30 days, you will need to consider leaving the FRS.
New entrant to the FRS must have a turnover of £150,000 or less and the £230,000 maximum threshold means that you will need to consider moving on to either the Cash Accounting Scheme or Annual Accounting Scheme.
The FRS rate of tax varies dependent on the industry you work in, a full list of FRS rates can be found here.
Are you a limited cost business?
When HMRC consider the FRS rates of tax they will firstly decide whether you are a ‘limited cost business’ or not. If goods in your business cost less than 2% of your turnover or £1,000 a year, if your costs are more than 2%, you are considered a limited cost trader.
If you are classified as a limited cost trader, you have to pay a higher rate of VAT at 16.5%.
There is therefore no real economic benefit of using the FRS if you are classed as a limited cost trader, although the reporting to HMRC is much simpler. For example, the FRS rates currently range from 4% to 16.5%, quite a difference in VAT costs across industries using the FRS.
If you are lucky enough to be an industry that has a FRS rate of 4%, such as a retail clothing store or a newsagents, you can see the attraction of staying in the FRS if your turnover is below £230,000 – cash profit and less reporting to HMRC.
How do I know what VAT scheme is right for me?
As a business, we recommend regulator monitoring your turnover (excluding VAT) to ensure that you are on the right VAT scheme. Compulsory registration in the UK is required from businesses earning £85,000 or above in a given 12 month period, but businesses can also join FRS if they are below this turnover threshold if, for example, they are subject to suppliers who charge VAT on a regular basis, to reduce running costs.
Tax is never simple
We understand how difficult it is to run a small business and understand fully your tax and legal obligations, and making the most of the tax reliefs available to you.
Please call if you would like to discuss your options.
Written by Shaima Todd.