An optional flat rate scheme was introduced with effect from 24 April 2002 by FA02/S23. At the introduction date the scheme was available to all small businesses:
Both the above requirements apply at the point of entry into the
scheme. Businesses check turnover each anniversary of joining the
scheme, if it is over £150,000 VAT inclusive they must leave
A business that joins the scheme avoids having to account internally for VAT on all purchases and supplies, and instead calculates its net liability by applying a flat rate percentage to the tax inclusive turnover. The flat rate percentage depends on the trade sector into which a business falls for the purposes of the scheme. There is a wide spread of applicable percentages ranging (on introduction of the scheme) from 5% to 14.5%.
Under the flat rate scheme businesses:
They do not have to record all the details of the invoices issued or purchase invoices received to calculate the amount of VAT they must pay to HMRC.
If capital assets are purchased with a VAT inclusive value of £2,000 or more, the VAT can be recovered in the normal way. This concession, however, cannot be used where the assets were:
Full details of the scheme are included in VAT Notice 733 ‘Flat rate scheme for small businesses’,, which is available on the HMRC Internet site.
The flat rate scheme removes the necessity to calculate VAT on
each individual input and output for the VAT account. Instead only
the flat rate VAT will need to be passed to the VAT account. Where
the concession for capital assets is adopted, the VAT reclaimed
will also pass through the VAT account.
Expenses will probably be shown inclusive of VAT as it is irrecoverable (similar to a business not registered for VAT), and it is likely that turnover will be shown net of the flat rate VAT payment. You may however find that the flat rate VAT payment is shown as a profit and loss expense rather than deducted from total turnover.
Where there is irrecoverable VAT on capital items it will form part of the cost of the asset on the balance sheet and of the cost for capital allowances purposes.
A business has gross sales of £94,000 (including output VAT
at 17.5% of £14,000), and expenses of £58,750 (including
irrecoverable VAT). The flat rate VAT @ 6% is £5,640. A new
machine is purchased (qualifying for capital allowances) at a cost
of £2,350 including VAT of £350.
The accounts will show:
|Turnover||£88,360||(£94,000 less £5,640 flat rate VAT)|
If VAT is not reclaimed on the asset the cost for capital allowances purposes will be £2,350. If VAT is reclaimed the cost will be £2,000.
The amount to be included under step 1 of the deemed payment calculation is the VAT exclusive amount whether or not the flat rate scheme is adopted. For the intermediary within the flat rate scheme in the example above the VAT exclusive amount would be £88,360. Irrecoverable VAT relating to allowable expenses met by the intermediary would be allowable as part of the expenses in the same way as if the intermediary was not VAT registered.
There is a special VAT scheme known as the flat rate scheme for
farmers which is used by a small number of farmers and
Flat rate farmers are not registered for VAT and consequently they cannot reclaim input tax. They can, however, charge and keep a flat rate addition of 4% when they sell qualifying goods or services to VAT registered customers. This addition is not VAT but acts as compensation for losing input tax on purchases. The flat rate addition is part of the business takings and should be included in sales.
Further information is available from the Business Information Unit (TIP124).