The VAT 'Flat Rate Scheme'
By John Shearer AIIT
Would it save you money or cost you more? Do you know?
The Flat Rate Scheme was introduced in the 2002 Budget and was designed to simplify the VAT accounting for small businesses. With effect from 1st January 2004 there are changes to the original rules and rates and it may be worthwhile to consider whether the scheme may benefit your business.
The scheme is open to businesses whose annual taxable turnover does not exceed £150,000 and whose total turnover does not exceed £187,500. There are a few categories of businesses that are not eligible to use the scheme and it is not suitable for repayment traders.
The basis of the scheme is simply that a fixed percentage of the total gross income of the business will be deemed to be the VAT due. No VAT on costs will be claimed specifically as the fixed rate has been calculated to give credit against VAT on costs. Large capital assets are an exception to this rule, subject to conditions.
There are currently 17 different fixed rates varying from 2% to 13.5% to cover different categories of business.
One chooses the rate most appropriate to the particular type of business carried out. For example the fixed rate for a public house is 5.5% while the rate for a taxi firm is 9%.
The scheme can be used in conjunction with the Annual Accounting Scheme. The scheme cannot be used in conjunction with the Cash Accounting Scheme, however has it's own form of Cash Accounting structure, which is similar. VAT invoices must still be issued to VAT registered customers, showing the normal VAT rate for the supply.
There are a number of interesting points to consider in relation to a particular business. If the business has different types of activities, then the rate is that appropriate to the major income stream. For example you might run a newsagent shop and provide computer services in the back-shop. If the news agency has the higher turnover then the rate for the whole business will be 2%, whereas the computer services would normally be at the 13% rate. Conversely there could be a disadvantage in applying the scheme to a mixed business if the above scenario were reversed!
Another issue is that VAT on costs is automatically credited within the fixed rate, however every business will have different levels of costs. A simple example might be if one business paid VAT on rent to his landlord and another did not. The scheme does not recognise any such variation in cost levels and while it may be beneficial to one business it might be disadvantageous to another in the same trade category.
Likewise the scheme does not recognise any variation of the standard or zero-rated mix of supplies made. Thus one business may have zero-rated exports or other zero-rated supplies and this income will be taxed at the flat rate. Similarly exempt income and despatches of goods to other member states will be taxed at the flat rate.
Apart from lowering the original rates from 1st January 2004 there is also the opportunity to benefit from an additional reduction of 1% for the first 12 months of registration. If registration occurred prior to that date then the balance of the 12 months can benefit from the reduction.
The message is therefore that before choosing or discarding the fixed rate scheme, have a close look at your particular business and carry out an analysis to clearly establish the likely benefits or otherwise. We would be pleased to assist to evaluate the possible benefits or disadvantages to your business.
