Getting VAT proper is an inescapable a part of being in enterprise for all however the smallest organisations.

That’s why you must contemplate whether or not you might make your life just a little simpler by making use of to hitch the VAT Flat Charge Scheme.

Learn this text to study what VAT is, discover out concerning the VAT Flat Charge Scheme and uncover if your corporation is eligible for it.

Right here’s what we cowl:

VAT (value-added tax) is a tax on the gross sales of products and companies paid by customers. For instance, if a VAT-registered enterprise sells a widget for £1, they are going to cost the client £1.20 (assuming the 20% price applies).

They may then go on the VAT they gather to the federal government, sometimes on a quarterly foundation, through a VAT Return.

Most gadgets bought by enterprise appeal to VAT. That is sometimes the usual price of 20%, however a diminished price of 5% can be used for a lot of gadgets, whereas there’s additionally a zero price. The latter isn’t the identical as one thing being VAT-free as a result of any zero-rated merchandise should nonetheless be included in your VAT file protecting).

The taxable turnover threshold that determines whether or not a enterprise have to be registered for VAT is presently £85,000.

At that time, the enterprise should begin accounting for the output VAT (what they cost on their gross sales), and the enter VAT (what they pay in purchases). The distinction between enter and output VAT is what you pay to the federal government and declare within the VAT Return.

The HMRC VAT Flat Charge Scheme for small companies, together with smaller restricted corporations, has existed for the reason that 2002 Funds.

It’s a simplification meant to alleviate small enterprise homeowners of among the administrative burden concerned with making ready VAT Returns.

As an alternative of accounting for enter and output VAT, you merely pay a set price as a share of your turnover. This price varies, relying on what you do.

There’s additionally a better flat price of 16.5% for companies thought-about to be limited cost traders. This was launched to crack down on what the federal government felt had been individuals abusing the scheme. These companies spend little on items, so had little or no equal enter VAT.

Nonetheless, it’s nonetheless an choice to be thought-about if you’d like easier VAT accounting.

A limited cost trader is outlined as one whose VAT-inclusive expenditure on items is both lower than 2% of their VAT-inclusive turnover in a prescribed accounting interval, or better than 2% of their VAT-inclusive turnover, however lower than £1,000 each year.

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To be eligible to join the VAT Flat Charge Scheme, your corporation have to be VAT-registered and anticipate your VAT taxable turnover to be £150,000 or much less (excluding VAT) within the subsequent 12 months.

You must depart the flat price tax scheme if, on the anniversary of becoming a member of, your turnover previously 12 months was greater than £230,000 (together with VAT) or if you happen to anticipate it to be within the coming 12 months.

Alternatively, your corporation could want to cancel its VAT registration in case your turnover (excluding VAT) falls beneath £85,000.

The introduction of the 16.5% larger flat price in 2017 could have diminished among the attractiveness of the VAT Flat Charge Scheme to small companies.

Nonetheless, it’s nonetheless necessary that you simply rigorously contemplate whether or not it might be higher for you to enroll in the scheme moderately than the Customary VAT Accounting Scheme if you happen to both need, or want, to turn into VAT-registered.

With Making Tax Digital for VAT, much more companies could discover they should account for his or her VAT utilizing software program, and have to maintain VAT accounting information digitally.

This can be a nice alternative to deliver your accounting updated, and get the advantages of the most recent know-how. You’ll be able to scale back admin, make life simpler, and do extra of what you’re keen on.

Simply because the flat price scheme goals to simplify VAT accounting, the foundations in relation to MTD for VAT are additionally just a little easier in comparison with that for traditional VAT accounting.

It’s essential maintain fewer digital information. Particularly, you don’t have to maintain digital information of:

  • Purchases, except they’re capital expenditure on which you plan to say enter tax
  • Related items used to find out if you want to apply the restricted price enterprise price.

Assuming the usual price of VAT is utilized with the Customary VAT accounting Scheme, your corporation should pay the 20% tax that it charged on eligible gross sales within the earlier quarter to HMRC.

But, you too can reclaim the VAT that you simply make in your purchases.

In consequence, the quantity of VAT that your corporation pays or claims again from HMRC is usually the difference between the VAT charged by your corporation to its clients and the VAT that your corporation pays by itself purchases.

With the VAT Flat Charge Scheme, your corporation pays a set price of VAT to HMRC and might maintain the distinction between what you cost your clients and what you pay to HMRC.

You’ll be able to’t reclaim VAT in your purchases, nevertheless, apart from sure capital property costing greater than £2,000.

Though restricted price companies are restricted to a better fastened price of 16.5%, these companies that don’t fall into the restricted price class can apply fixed VAT flat rates starting from 4% to 14.5% to their gross turnover, together with VAT, relying on the enterprise sector or kind.

An promoting company would apply a set VAT flat price of 11%, for instance, with that determine falling to 9% for a textile producer.

There are a variety of different VAT schemes, such because the cash accounting scheme, that may be value exploring too.

Simon Dolan, founding father of Dolan Accountancy, believes the HMRC Flat Charge Scheme continues to supply the advantages of much less administration for enterprise homeowners and a possible increase to earnings.

As soon as you understand how to finish the net type, accounting for flat price VAT is a reasonably simple course of since filling in a flat price VAT return is normally simpler than filling in an ordinary price VAT return.

“You’ll solely want to inform HMRC how a lot you’ve charged in VAT in complete,” he says.

“There is no such thing as a have to reconcile your receipts. There’s additionally the chance to earn cash from the flat price scheme.

“For instance, if you happen to cost 20% VAT and also you pay a flat price share of 16.5% on product sales, you retain the distinction.

“As well as, if you’re a brand new enterprise, you’ll be able to profit from an additional 1% low cost in your first 12 months of buying and selling.”

The principle drawback of the VAT Flat Charge Scheme, in contrast with the Customary VAT Accounting Scheme, is {that a} enterprise can’t reclaim VAT on its purchases.

“Relying on your corporation, if you happen to purchase inventory or you’ve a excessive quantity of VATable bills, you’ll be able to’t get the VAT again,” Simon explains.

Questioning whether or not the VAT Flat Charge Scheme is the most suitable choice for your corporation?

Simon advises you to calculate whether or not the quantity of VAT you might reclaim out of your month-to-month bills would outweigh the low cost you get from taking part within the scheme.

Graham Elliott is the director of Metropolis & Cambridge Consultancy. He says one potential pitfall for companies that use the VAT Flat Charge Scheme is most of an organization’s ‘exempt’ revenue – revenue it’d earn from leasing out business land or property, for instance – is taxed on the flat price, with checking account curiosity being a notable exception.

“Most exempt income is taxed on the flat price, which is a serious lure,” he says. “In truth, this additionally applies to zero-rated and reduced-rated provides.”

One other problem for some companies is figuring out the right VAT flat price, primarily based on their enterprise kind. It’s because it isn’t at all times clear what commerce class a enterprise falls into.

“For a lot of, the commerce class is simple,” says Graham. “However, for some, it’s troublesome as a result of the classification is geared in direction of easy, mainstream trades.

“HMRC refuses to resolve on the scheme consumer’s behalf however can problem the selection that the scheme consumer makes.”

Zoe Gibbons, a companion at Perrys Chartered Accountants, additionally factors out that the possible development price of your corporation must be taken into consideration.

If the income of your corporation was prone to quick exceed the higher restrict of £230,000, you’d quickly have to depart the Flat Charge Scheme anyway.

She says: “What you are promoting ought to contemplate its marketing strategy and forecast turnover figures as a result of whether it is anticipating to develop rapidly, it might be extra useful to arrange below the usual scheme initially to get into good follow.”

The subtleties concerned imply that selecting the VAT Flat Charge Scheme above the Customary VAT Accounting Scheme is just not essentially an easy taxation resolution.

Because of this, Zoe believes you must focus on your choices together with your accountant you probably have one.

She says: “As every enterprise is completely different, and could have a unique set of circumstances, and VATable outputs and inputs, you will need to communicate to your accountant to substantiate which scheme can be most useful for the enterprise, each from an administrative and a tax viewpoint.”

What you are promoting must be registered for VAT with a view to be a part of the VAT Flat Charge Scheme. It’s attainable to use by publish, cellphone or e-mail however the easiest method might be to fill within the on-line software type VAT600FRS.

To fill within the type, you’ll have to following data:

  • Enterprise identify
  • Enterprise handle (you simply want to focus on whether or not it’s positioned within the UK or not)
  • Phone quantity
  • VAT registration quantity
  • Particulars in your foremost enterprise exercise
  • The flat price share you’ll use
  • The date you’d like to start out utilizing the VAT Flat Charge Scheme (HMRC will notify you of the date however you’ll be able to go for one other date if vital – you’ll have to focus on the rationale in your new date)

To use by publish, you have to to obtain the shape, fill it in and ship it to the Nationwide Registration Service at: HM Income & Customs, Nationwide Registration Unit, Imperial Home, 77 Victoria Road, Grimsby, DN31 1DB.

For cellphone functions, contact the HMRC VAT Helpline on 0300 200 3700. E mail functions could be made by sending a accomplished VAT600FRS type to [email protected]

In the end, the query of whether or not the VAT Flat Charge Scheme is true for your corporation will rely on:

  • What your organization does (that may decide the flat price VAT sector and flat price VAT tax price that apply)
  • What sorts of VATable outputs and inputs the enterprise has
  • How rapidly its revenues may surpass the flat price VAT restrict
  • Whether or not it earns ‘exempt revenue’.

When you’ve got entry to an accountant, they are going to be in a position that can assist you make the choice that’s most applicable for your corporation circumstances.

Editor’s notice: This text was first printed in November 2018 and has been up to date for relevance.

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