EBS Blog

Flat Rate Vat

Alleviating the VAT headache – advantages of the flat rate scheme

Accounting for Value Added Tax (VAT) can be time-consuming and cumbersome procedure. However, for many small businesses the flat rate scheme not only offers the opportunity to reduce the administrative burden, but also the opportunity to save money.

How does the scheme work?

Under the flat rate scheme business pay a certain percentage of their ‘flat rate’ turnover (see below) to HMRC as VAT each quarter. The flat rate percentage used depends on the type of business. The rates applying from 4 January 2011 can be viewed on the HMRC website.

Unlike standard VAT accounting the business is not required to work out the difference between the VAT charged to customers and that paid on purchases. The flat rate percentages are calculated to ensure that a comparable amount of VAT is paid to HMRC.

Who can join?

As the scheme is designed to help small businesses, it is only open to those whose estimated taxable turnover (excluding VAT) in the next year is £150,000 or less. Taxable turnover is everything that a business sells that is liable to VAT at the standard rate, reduced rate or zero rate. It does not include exempt sales or sales of capital assets. Please note that this is different from the flat rate turnover, which includes VAT and exempt sales or sales of capital goods.

Once a business has joined the flat rate scheme it is able to remain in the scheme even if the turnover rises above £150,000. However, businesses must leave the scheme once total business income reaches £230,000.

Once a business has left the scheme, it is not eligible to re-join for 12 months.

Advantages of the scheme

The main advantage of the scheme is that it greatly reduces the record-keeping requirements, which can save a lot of time. Businesses in the scheme do not need to record the VAT that they charge on every sale and every purchase, as is necessary under the standard VAT regime. It is also much easier to operate as the percentage is simply applied to turnover without the need to work out the VAT that can be reclaimed and that which cannot, in addition, many businesses enjoy the certainty of always knowing the percentage of their takings that will be payable to HMRC.

Furthermore, newly-registered businesses using the flate-rate scheme can benefit from a discount of 1% on the flat rate percentage for the first year of registration. The discount is available until the day before the first anniversary of the date on which the business became VAT-registered.

Other points to consider

It is important to note that the VAT flat rate scheme may not suit everyone. In fact, it may work out more expensive for businesses that buy mostly standard-rated items, businesses that would normally receive a VAT repayment under the standard rules, or businesses that make a large amount of exempt or zero-rated supplies.

HMRC publishes a ready reckoner to allow businesses to see how much they may pay under the scheme. However, there is no substitute for one-to-one advice, so please contact us.

Premier Protection Insurance

In April 2009 HMRC’S powers increased dramatically they are now able to:-

Make inspections unannounced
Check your records before a tax return is filed
Demand records without issuing a formal notice
Ask third parties to check the accuracy of information
Investigate direct taxes, VAT and employer compliance.

Premier Protection Insurance Policy is a tax protection service which has been especially created to deal with these new powers and to protect you against the unexpected costs of such an investigation.

With our Premier Protection Service you continue to deal with us, your accountants you know and trust and we’ll be free to work on your case for as long as it takes to resolve the situation, up to £100,000 per case. We are also experienced in negotiating with HMRC and are therefore focused on resolving the dispute as quickly and painlessly as possible.

Included with the policy is a business support helpline which includes a team of experts at the other end of the phone to help with Employment Law, Health and Safety Issues and Commercial Legal Issues.

DIRECT PAYMENT SCHEME

Most people working as an employee in the UK have a UK employer, or are attached to a business in the UK which is treated as their employer, who is then legally responsible for deducting Class 1 National Insurance from their pay.

Where there is no business in the UK (or in the European Economic Area (EEA)) responsible for deducting National Insurance, the employee must pay his or her own Class 1 National Insurance to HM Revenue & Customs (HMRC

Where you have no employer in the UK or business treated as your employer, you will be responsible for paying your own employee Class 1 National Insurance, through a Direct Payment Scheme, to HMRC.

EBS is able to set these schemes up for you in line with HMRC regulations should you wish to enquire. There are some initial set up questions but when they are satisfied they will allocate a paye number.

The monthly payments are taken in the currency of the country and then using the HMRC exchange rates converted into gbp and then put through sage software to calculate the amount of tax and national insurance contributions for both employee and employer amounts.