The flat rate scheme is designed to aid cash flow management and help ease VAT administration for small businesses. In order to be eligible to register for the flat rate scheme, your business must have an annual turnover of less than £150,000. HM Revenue & Customs have agreed flate rate percentages which are determined by the type of trade undertaken by the business and applied to the total turnover, including zero rated and exempt supplies.
The percentage applied under the scheme is always lower than the standard rate of VAT and currently rates vary between 3.5% and 13.5%. In the first year of registration under the scheme, the business benefits from a 1% reduction on the flat rate percentage allocated for the trade category.
The reduction in the amount of output VAT is countered by the trader being unable to recover input VAT in the normal manner on their purchases made for business use, however it is possible to reclaim the full amount of input VAT on the purchase of any fixed asset which costs more than £2,000 including VAT.
The advantages of the scheme include lower administration and processing costs, allowing the small trader to focus on the integral business activities rather than the burdensome VAT administration process. There is also less chance of making mistakes on your VAT return using the scheme, so the chances of investigation by HM Revenue & Customs or incorrectly claiming input VAT which you were not entitled to are reduced.
A business can opt out of the scheme at any time, so once registered it is advantageous for traders to make a comparison each VAT quarter to compare the position between the flat rate scheme and normal accruals accounting. If the accruals method is producing lower payments or even refunds it may be beneficial to change schemes.
It is important to remember that each business must be considered on its own merits and therefore you should seek advice before deciding to register for the flat rate scheme. Your local TaxAssist Accountant will be happy to discuss this with you.
By Jo Nockels
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