Joining the Flat Rate Scheme for VAT

You can apply at the time you register your business for VAT, or any time later. If you apply near the time of your VAT registration, you can start using the scheme from the date you are registered for VAT. Keep a copy of your application with a note of the office you send it to. HMRC will notify you in writing if your application is successful informing you of the date you can start to use the scheme. This is normally the start of the VAT period following receipt of your application.

Certain businesses, for example, have been convicted of an offence in relation to VAT or in a VAT repayment position. If a proportion of your supplies are exempt, therefore zero rated, it may not be beneficial to adopt the scheme.

Leaving the Flat Rate Scheme for VAT

You must leave the scheme if you’re no longer eligible to be in it i.e. if:

  • on the anniversary of joining, your turnover in the last 12 months was more than £230,000 (including VAT) - or you expect it to be in the next 12 months:
  • you expect your total income in the next 30 days alone to be more than £230,000 (including VAT.

Once you leave the scheme you cannot re-join it until twelve months have elapsed.

Considering the Flat Rate Scheme for VAT

There are two main benefits in adopting the scheme; time saved recording quarterly VAT on sales and purchases with the removal of any stress that may bring and; better cash-flow management as you can easily calculate in advance how much VAT you owe on takings.

The saving that arises is not simply the difference between the flat rate and standard rate VAT applied to VAT exclusive income. The flat rate is applied to VAT inclusive income. By entering the scheme your company loses its ability to reclaim VAT on the majority of goods or services used in the course or furtherance of your business.

Before adopting the Flat Rate for VAT Scheme you must consider the VAT lost on expenses and purchases against the benefit of calculating VAT using the relevant flat rate scheme percentage. Your company may still recover VAT incurred on capital assets it purchases with a VAT inclusive value of more than £2,000 (with the exception of company cars).

However, from 1ST April 2017, we explain the changes that will make the adoption of the flat rate scheme less attractive and therefore the standard rate VAT scheme more appropriate for your business.

The correct percentage rate for your company- ‘Limited Cost Traders’ Flat Rate VAT Percentage

As announced in The Autumn budget, from 1st April 2017, so-called ‘limited cost traders’ will use a new 16.5% rate when calculating their FRS liabilities. All other businesses will continue to use the current percentages used by HMRC.

As a contractor, who does not buy a significant amount of goods, it is unlikely that you will be able to benefit from the sector rates formerly applicable to your trade and noted below from 1ST April 2017:

Example sector rates (from 4 January 2011): Engineer (including general, civil, structural) 14.5%; Computer, IT Consultancy or Data Processing 14.5%; Management Consultancy 14.0%.

A guide to working out your flat rate percentage and the options arising from these changes  and the VAT you need to pay on the Flat Rate Scheme is available from HMRC.

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