VAT flat rate scheme: Dos and don’ts

It may sound simple, but the flat-rate scheme for VAT continues to cause problems for businesses and their accountants. This article from our Business Tax Library sets out the basic rules behind the scheme, and highlights some of the potential pitfalls.

Under the flat rate scheme (FRS), you pay VAT as a fixed percentage of your VAT-inclusive turnover. The actual percentage you use depends on your type of business.

The VAT flat rate scheme can work quite well for businesses on low FRS rates and few purchases, explained tax barrister Anne Fairpo in her 12 November podcast. “For example, in the ‘any other activity’ category it can work in the business’s favour: 12% of 120% is 14.4% rather than 20%, which would generally have to be accounted for to HMRC,” she said.

Register with AccountingWEB and log in to read the full article, which covers:

  • How the VAT flat rate scheme works
  • Who can't join the Flat Rate Scheme
  • Working out your flat rate percentage and the VAT you need to pay
  • Potential benefits of using the Flat Rate Scheme
  • Potential disadvantages of using the flat rate scheme
  • Is it worth registering with the scheme?
  • FRS dos and don'ts

Further reading

Continued...

» Register now

The full article is available to registered AccountingWEB members only. To read the rest of this article you’ll need to login or register.

Registration is FREE and allows you to view all content, ask questions, comment and much more.

Comments

FRS- article definition of turnover

twickers | | Permalink

 article definition -
"Your VAT taxable turnover is everything that you sell during the year that is liable for VAT. It includes standard, reduced rate or zero rate sales or other supplies. The scheme excludes the actual VAT that you charge".....surely the rules are that the figures INCLUDE the actual vat
charged ????

Constantly Confused's picture

Not quite    1 thanks

Constantly Confused | | Permalink

twickers wrote:

 article definition -
"Your VAT taxable turnover is everything that you sell during the year that is liable for VAT. It includes standard, reduced rate or zero rate sales or other supplies. The scheme excludes the actual VAT that you charge".....surely the rules are that the figures INCLUDE the actual vat
charged ????

No, to decide if your turnover is low enough to join the scheme you use VAT exclusive figures.  But after that you always use inclusive, for working out the VAT and deciding if you have to leave.

I starnd corrected/ I

twickers | | Permalink

I starnd corrected/ I withdraw to my shell/  good article-  flat does cause confusion and misunderstanding/  

Constantly Confused's picture

:)    1 thanks

Constantly Confused | | Permalink

twickers wrote:

I starnd corrected/ I withdraw to my shell/  good article-  flat does cause confusion and misunderstanding/  

:)

I had to stop reading the article as the grammar and spelling mistakes were setting my OCD off...

deleted...

Iwazaru | | Permalink

 

Comment deleted...

What is the current thinking

Eric T | | Permalink

What is the current thinking on Bank Interest Received for a business on the Flat Rate Scheme.

At one point HMRC were insisting that this was part of VATable income for Flat Rate purposes.

Is that still their stance?

'non debtor business receipts'    1 thanks

kiwilondon99 | | Permalink

 

i gather that bank interest received now has been EXCLUDED from the FRS liability calculation.  Is that correct ?

 

What about other receipts such as

* dividend and preference share interest

* sale of shareholding [ shares held as investment say 1000 BT !! for example ] irrespective of whether a gain or loss is made - are the gross proceeds to be included in the FRS liabilty calc

* compensation - bank paying you £ 100 for fixing one of their 'errors'

* insurance claim recoveries

just a few that spring to mind, so thanks for any subsequent responses.  After all, reality of FRS on a single sales invoice is the utopia, but not what most would expect in a SME trading

VAT flat rate scheme

Oppco | | Permalink

Surely receipts and supplies outside the scope of VAT are excluded from FRS turnover?

What about supplies of services to EU 'VAT' registered customers? These are outside the scope of VAT, and mostly subject to the VAT reverse charge. Presumably these are also left out of then FRS calculation?

 

 

VAT FLAT RATE SCHEME - Exempt Sales

TC2 | | Permalink

The article says: "So the VAT flat rate scheme might not be right for your business if: ....

  •  You make a lot of ... exempt sales."

The article also says that exempt sales are excluded from the calculation of FRS VAT, which is surely right.  As, in the ordinary scheme, you have to excluse purchases relating to exempt sales, surely exempt sales are IRRELEVANT to a decision about FRS? 

Constantly Confused's picture

No no no

Constantly Confused | | Permalink

TC2 wrote:

The article says: "So the VAT flat rate scheme might not be right for your business if: ....

  •  You make a lot of ... exempt sales."

The article also says that exempt sales are excluded from the calculation of FRS VAT, which is surely right.  As, in the ordinary scheme, you have to excluse purchases relating to exempt sales, surely exempt sales are IRRELEVANT to a decision about FRS? 

 

If you are a post office (5% FRS) and you have £2,000 of SR income and £8,000 of exempt income, under the FRS you will be due to pay £500.  Exempt sales increase the FRS VAT.

However I believe you don't include them when deciding if you can join... but that's off the top of my head.

ccaspell's picture

Sale of services to other Member States of the EU    1 thanks

ccaspell | | Permalink

"if your supplies are outside the scope of VAT, leave them out of your flat rate turnover.This will depend on the place of supply of the services - see Notice 741 Place of supply of services."

 

See: http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.por...

FRS turnover    1 thanks

harbourmaster | | Permalink

Exempt supplies should be included in turnover (but at least you're spared a partial exemption calculation).

Particularly for a sole trader, isn't it the person who is registered, not the business, so you have to watch out for other income particularly letting income which might well get caught as turnover.

Closely Connected?

ismac65 | | Permalink

There doesn't seem to be a clear definition of this and I note that HMRC use as an example they would allow to use the FRS; a husband and wife, each with their own business sharing one premises.

I have a client that is a ltd. co owning a 49% share of an LLP, which in itself is VAT registered under the standard scheme. The company is offering different services to the LLP.

I'm assuming that the ltd co, which is just about to register for VAT would be precluded from the FRS as being "closely connected" to the LLP?

Rental income

henrybanwell | | Permalink

Can anyone confirm treatment of Rental income (from a few Buy to Lets)for a FRS registered sole trader with a completely different business please?

Well Spotted

wayne | | Permalink

I was going to make the same point re: exempt sales included in turnover for FRV calculations.

Bank Deposit Interest & Rental Income

pauljohnston | | Permalink

Is excluded I believe unless the trader is actively managing it ie moving it amongst banks to get the best rate.  Just putting on deposit is not a trade.

Regarding Henry Banwall's question - it will depend on the structure of the busineses's.

 

peterlashmar's picture

VAT flat rate %

peterlashmar | | Permalink

Al these comments illustrate how complicated or ill defined this is. Bank interest etc. is still included for purpose of computing total turnover and determining eligibility for staying in FRS but it not liable to VAT.

However, the fundamental problem is as illustrated in the 1st paragraph in comparing the % to be applied.

12% of 120 is, correctly computed at 14.4%

BUT on the normal basis VAT would be £20 which = 16.67% of 120 NOT 20%.

The comparison is therefore;

                                             of gross t/o

Flat rate scheme                        12%               =    £14.40 

Normal basis                              16.67%          =    £20

 

Accounting - we have many clients who use FRS and we instruct then to account for VAT in the normal way and then compute VAT to pay on FRS and show the difference as "VAT flat rate difference". That will clearly show the gain or loss on using FRS and enable usage of FRS to be monitored.

Another minefield for businesses.

 

Peter Lashmar

Lashmars tax Accountants

Tel   01590-688838

e     peter@lashmars.co.uk

 

 

Red Leader's picture

include/exclude

Red Leader | | Permalink

My understanding is that you include the following in the FRS sales to which the flat rate % is applied:

a) exempt sales

b) rental income

but you exclude:

c) sales made where the place of supply is outside the UK.

Rental Income and Bank Interest

johnhill123 | | Permalink

As far as I'm aware all vatable supplies are included for calculating your FRS VAT. That is:

  • Standard Supplies
  • Exempt Supplies
  • Zero rated supplies

Rental income for Buy to Lets or any other residential dwelling is zero rated and therefore is included in the FRS calculation.

To avoid, you may want to put rental property in joint names, thus different legal entity (a partnership) and therefore not within a sole traders FRS turnover.

I thought Bank Interest is excluded as surely it should always have been as it is outside of scope.

Constantly Confused's picture

Thexton/Fanfield

Constantly Confused | | Permalink

johnhill123 wrote:

I thought Bank Interest is excluded as surely it should always have been as it is outside of scope.

Only since Thexton/Fanfield (First Tier Tribunal) and that was only in the last year or so.

Bank Interest

johnhill123 | | Permalink

Constantly Confused wrote:

johnhill123 wrote:

I thought Bank Interest is excluded as surely it should always have been as it is outside of scope.

Only since Thexton/Fanfield (First Tier Tribunal) and that was only in the last year or so.

Yes, I'm aware it is a recent change but cannot understand why it was treated as a taxable supply in the first place. I guess that might have been why HMRC lost the tribunal?

flat rate vat

twickers | | Permalink

to Constantly confused/  my apology for upsetting you/ this is a discussion site ?/ not a

lesson in english/ try  Wikipedia

Old Greying Accountant's picture

Is it me ...

Old Greying Acc... | | Permalink

... but nothing has been said about the fact you cannot go on FRS if you use cash accounting for VAT. You must be on invoice accounting, so whilst the building trade is generous at 9.5%, if you are wating 90 - 120 days for your money (not uncommon) then the lower payment may not be as enticing if you have no income from which to pay it!

Happy to be corrected if I misread it, but that was what it stated on the online VAT registration I completed this week as mentioned by me here:

http://www.accountingweb.co.uk/group-thread/vat-registration 

 

 

Sale of cars

Barkster | | Permalink

I have been on several VAT lectures where it was suggested that, bizarrely, the proceeds from the sale of a car in the business would also be included as turnover for the FRS calculation !

Fact or fiction ?

There is a cash based

Lilac1 | | Permalink

There is a cash based turnover method you can use with the flat rate scheme which is similar to the cash accounting scheme. Tried to post the link to HMRC website but it didn't work. It's chapter 9 of the flat rate scheme for small business, if that's any help?

DMGbus's picture

Sale of let property or a car - liable to FRS VAT!

DMGbus | | Permalink

Yes the rules for cash accounting actually do require the sales proceeds of a property that's been rented out or a car to be subjected to Flat Rate VAT liability.

The only concession is that apparently HMRC will let a business retrospectively exit the Flat Rate Scheme to escape the punitive VAT liability arising on disposal of a rental property.

So much for a "simplified" scheme of VAT accounting - hidden costs.

A "simplified" VAT accounting scheme that has guidance that runs to some 41 pages.

Constantly Confused's picture

Wut?

Constantly Confused | | Permalink

twickers wrote:

to Constantly confused/  my apology for upsetting you/ this is a discussion site ?/ not a

lesson in english/ try  Wikipedia

I was pointing out grammar and spelling issues in the article, unless you wrote the article I don't understand why you are suggesting I have criticised you...

Red Leader's picture

cash accounting

Red Leader | | Permalink

I was struck by OGA's comment that you can't use cash accounting and the flat rate scheme.

Looking at section 9 of VAT Notice 733, it states: "Apply the flat rate percentage to the VAT inclusive supplies for which you have been paid in the accounting period." It then goes on to define "paid". I suspect that this is just a very slightly different definition of "paid" for FRS compared to "paid" for the regular cash accounting scheme.

Old Greying Accountant's picture

I was just saying ...

Old Greying Acc... | | Permalink

... what it said on the online VAT registration application, next one I'll look more closely!