Your business may be better off adopting this method of calculating your quarterly VAT bill unless:
• Your turnover is above £150,000 and the other qualifying rules do not apply.
• Your expenditure on standard-rated business expenses is more than HMRC consider typical for your business sector;
• You regularly receive VAT repayments under standard VAT accounting, or
• You make a significant amount of zero-rated or exempt sales.
The method of calculating VAT due is simplified: it is based on a fixed percentage of your VAT inclusive turnover from all sources. There is no need to record the VAT included in your purchases. The latest Flat Rate percentages were fixed when VAT was increased to 20% on 4 January 2011.
The Flat Rate Scheme also allows you to adopt a form of cash accounting so you will only pay VAT on VAT inclusive turnover paid in the relevant quarter. The key planning point is to work out the net cost of running with the Flat Rate Scheme before you register.
There are also disadvantages: sales of second hand vehicles have to be included in turnover subject to the flat rate percentage even though no VAT is actually added to the sales price; some bank interest is subject to the flat rate percentage; input VAT on certain, one-off, large purchases may be lost.
Businesses must leave the scheme:
• On the anniversary of joining the scheme if the previous year's VAT-inclusive turnover was more than £230,000;
• If they expect their turnover in the next 30 days alone will be more than £230,000;
• If they start to use one of the other special schemes such as one of the margin schemes for second-hand goods, art, antiques and collectibles, the tour operators margin scheme, or the capital goods scheme;
• If the business becomes part of a larger group or division or becomes eligible to do so.
Businesses that leave the flat rate scheme are unable to rejoin it for at least 12 months.
Disclaimer – Please note: The ideas shared with you in this article are intended to inform rather than advise. Taxpayers’ circumstances do vary and if you feel that tax strategies we have outlined may be beneficial it is important that you contact us before implementation. If you do or do not take action as a result of reading this tax factsheet, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.
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