VAT Flat Rate Scheme – what to be aware of
The flat rate scheme is supposed to simplify accounting however there are a number of drawbacks that you need to look out for and some little known rules that you could take advantage of.
Flat rate scheme
The flat rate scheme (FRS) is designed as an administrative simplification for businesses with a turnover of less than £150,000 p.a. Depending on your business sector, you can apply a fixed percentage to all of your turnover and pay this to the HMRC. It can be useful for some businesses but there are problems to be aware of, what are these?
Choose your category with care
To select the appropriate flat rate percentage, you need to choose the trade sector which most closely reflects your business. If it makes supplies in more than one sector, you may choose the one in which its sales are largest. You will need to monitor the balance of your business and if it changes, alter the category. In a recent example, a pub joined the FRS and put down its category as “public house” with a flat rate of 6.5%. However, the pub also sold food and these sales were greater than the bar sales. The HMRC decided it should be using the category for catering and restaurants with a flat rate of 12.5%. As a result, the pub received a large bill plus interest and penalties.
The HMRC also closely monitors the building and construction trade. There are two different categories: (1) businesses that are labour only – the HMRC allows up to 10% of turnover to cover materials – with a flat rate of 14.5%; and (2) general building and construction services with a flat rate of 9.5%.
The pitfall of selling a company car
If you have company cars the sale of which creates a surprise as the sale of the car must be included in the flat rate takings for the period. Although there’s no VAT charged on the sale, and no VAT would have been reclaimed on the purchase, you must account for VAT at your normal flat rate on the proceeds of sale. Accordingly, if you sell a car for £1,000 and your VAT flat rate percentage is 10%, you will have to pay £100 to the HMRC.
Staying in the scheme
If your turnover exceeds £230,000 then you have to leave the FRS. However, if you can satisfy the HMRC that turnover in the next year will be under £191,500 you can stay in it. Therefore, if you have a one-off increase in turnover, or sell an expensive piece of capital equipment, you can stay in the FRS if you expect your turnover to fall again.
The HMRC originally stated that bank interest had to be included in the turnover when accounting for the flat rate percentage. However, following a stated case in which the taxpayer challenged the HMRC’s view and won; interest no longer has to be included.