The Flat Rate Scheme was introduced to simplify accounting for VAT for small businesses turning over less than £150k net of VAT. Rather than calculating the VAT on individual sales and purchases you just work out the figure due to HMRC based on a percentage of gross (VAT inclusive) sales receipts. The percentage depends on the type of business you are in and is designed to mirror the results calculated in the conventional way for that class of business.
Registering for the scheme
You have to decide which sector is closest to the business you are in, if you operate in more than one sector you must register in the one which is the largest part of your business. One of the benefits if you register within a year of registering for VAT is that you qualify for a 1% discount in the rate for the first year in the flat rate scheme. There is a registration form which you can fill in either when you first register for VAT or at a later date. From the date you are registered you should start to use the flat rate scheme.
Changes and unusual circumstances
If your business type changes you will need to advise HMRC, if it is just a different part of your trade becoming greater you should change from the anniversary of registration, but if one ceases you should change the rate from the date that the trade ceased. In any event you will have to inform HMRC. If HMRC change the rate for your sector you should change the rate from the date they specify.
If you purchase an asset or a number of assets from the same supplier for more than £2000 you can claim the VAT on these as a separate item as these are not accounted for in the scheme.
Leaving the scheme
While you can opt in to the scheme when turnover is less than £150k you do not have to opt out until your turnover is over £225k
Areas to consider before registering
The benefits of the scheme are probably most relevant to small businesses who want simple bookkeeping, you do not have to record VAT on every sale or purchase, there are fewer rules to know and follow which means you will make fewer mistakes. You will also know exactly what percentage of your turnover you will have to pay out. You should not register if you do not fit the normal profile of a business in your sector as you may pay more VAT than necessary. The best advice is to check how much VAT would have been due under the flat rate scheme and compare that to the calculated VAT using the normal method. Remember you have a year from VAT registration to benefit from the 1% discount.
The details above are an overview only and may not include all of the issues you need to consider and you should seek professional advice or refer to HMRC website which is appropriate to your situation before taking any action.
Alastair Wood, AW Accounting – Accountants who “speak your language”