Oh – such a fun topic this is – I am sure you will be riveted to your computer screen.
Using the standard rate scheme, you need to record the vat on every purchase and every sale that is made in the business. However, a flat rate scheme allows you to just account for the VAT on the taxable supplies you make and not make a return for the VAT you have incurred. A lower amount is remitted to HMRC which takes into account VAT you may have suffered.
It is only available if both these conditions are met:
- the estimated VAT taxable turnover – excluding VAT – in the next year will be no more than £150,000
- the estimated total business income – including VAT – in the next year will be no more than £191,500
Once on the scheme, a business can remain on it until their total business income exceeds £230,000
There is a separate form to join the flat rate scheme;
A list of the flat rate percentages if published by HMRC, but it is your responsibility to check this list on a regular basis as flat rates do change and you need to adjust to the new rate at the correct time.
One thing you may not know is that if you apply to use the flat rate scheme, you can have a 1% reduction on your flat rate for the first 12 months of the business applying VAT. For example, you apply to become vat registered effective 1st July 2015 and you apply for the flat rate scheme of 12.5% effective on that same date, you can apply 11.5% to your turnover until the day before the first anniversary of being VAT registered. So all invoices up to the 30th June 2016, can be paid over at 11.5% instead of 12.5%.
If the business did not start applying the flat rate scheme until 1st December, they could still only have the 1% reduction until the 30th June. Of course, if the business waits a couple of years before applying for flat rate, then they cannot use the 1% discount at as it is passed the first 12 months of VAT registration.
But, how does it work?
You raise invoices to your customers and you add 20% VAT onto the invoice and declare it as VAT.
When it comes to the end of the quarter, add up the total that is on the invoices including the 20% VAT element and then apply the applicable flat rate to this amount. This then gives the amount to be paid over to HMRC as your vat submission. No VAT can be recovered on purchases.
Hey look – you get to keep some of the money that you collected – woo hoo. It is only a good thing if your costs are not high, or your costs are mainly zero or except VAT. This is something that needs to be assessed before flat rate is applied for. The money you do get to keep becomes part of the business income and is tax as such as income for income tax or corporation tax. Boo hoo.
This table shows invoices raised in the quarter, and the amount of VAT to be recorded and paid over on the VAT return.
|Net||VAT 20%||Gross||Flat rate 12.5%||Income gain||1st Year||1st yr gain|
This works well provided you don’t buy anything big or have lots of input VAT. The VAT man has made an allowance. If you do buy a piece of equipment that is priced over £2000, you can reclaim the VAT on this.
What is the cash accounting scheme?
On the standard rate scheme, you need to account for VAT based on the date that the invoice was raised (or tax point) and also the date you committed to a purchase – so the date the invoice to you was dated/received is significantly different. This may seem unfair as you could raise an invoice in the last few days of the VAT quarter, but you won’t get paid for six weeks. You need to have the cash in the bank to pay over the VAT before you have received it.
Cash accounting allows the business to set the tax point date of the date that their invoices were paid, and the date that they paid suppliers. Turnover must be less than £1.35m and the scheme can be used until the business turnover reaches £1.6m .
Annual VAT Accounting
There is the other extreme that is available if your turnover is less than £1.35m and that is an annual scheme. Don’t get excited now. You make 9 monthly payments (or 3 quarterly payments) to HMRC, complete one annual return and then the balancing amount is calculated and the final payment or refund is made at the end of the year. The scheme can be used until the business turnover reaches £1.6m .
The information contained in this document is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is provided or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.