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Flat Rate Scheme
In the Budget, the Chancellor confirmed that the VAT Flat Rate Scheme is extended from 10 April to businesses with taxable turnover of up to £150,000. The idea of the scheme is to simplify your accounting - instead of having to decide whether each individual sale is standard rated, zero rated or exempt from VAT, you just charge what you can to your customers, and take a fixed percentage of your gross receipts as VAT. To simplify matters further, you no longer bother to claim input tax back on your expenses.
The fixed percentage varies from business to business, and it's supposed to reflect the likely amount of exempt or zero rated sales that will be included in the charge, and the likely amount of input tax that you will no longer be claiming. As it's your choice whether to go into the scheme or not, you could 'make money' - pay less of your takings to Customs - as well as making your life simpler. Or you could lose out.
It's important to take this decision based on a proper understanding of how the figures will be affected, and whether it will really offer a simplification for your business. As the scheme has been extended upwards, it can potentially save more money. We can advise you on whether it will be appropriate for
you.
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A decision on joining the flat rate scheme depends on a careful consideration of the particular circumstances of the business - it is necessary to consider what flat rate will apply, the mix of sales, and the amount of input tax that will no longer be claimed. The end result should be:
- you gain the difference between the flat rate percentage (FRP) and 7/47, applied to your gross standard rated receipts (117.5% x standard rated sales);
- you lose most input tax, and also the FRP applied to exempt and zero rated receipts;
- input tax on capital expenditure costing at least £2,000 gross, and sales which are outside the scope of VAT, are "neutral", because such input tax is recoverable even under the scheme, and such sales are still outside the scope of the scheme.
It is also crucial that the business recognises that it is still necessary to keep records - not necessarily the particular records that are required to back up a VAT claim, but it is not true that purchase invoices can be dispensed with!
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