To start the New Year off I wanted to talk to everyone about the use of the Flat Rate Scheme, especially to those smaller businesses out there. My own personal reason for starting my year of 'VAT tips' off with this one is, despite my various attempts at advising my father of his need to stop feeding the pockets of HMRC and indeed implementing the flat rate scheme to save money, he has still to take stock and listen. I have decided that if my own family wish to ignore the wealth of free advice they gain from my position (I do hope the MD isn't reading this!), then there will certainly be other businesses out there that are willing to pick up on these free tips!
The Flat Rate Scheme is still one of my favourite schemes for the smaller businesses yet it still is not used enough. For those of you frightened of 'schemes' it really is one scheme which makes life much simpler. The basic idea is that you charge VAT in full on all your income, issuing invoices as normal (this will include exempt income too), but you only pay a set % over to HMRC (depending on your main line of business), thus simply pocketing the difference. The 1% first year discount is still available for those who are newly VAT registered thus making the scheme rather attractive for most small businesses. I would especially urge those who work from home and thus incur minimal input VAT to make sure they are on this scheme. I say this, as the other side to the scheme is that you are unable to recover any input VAT (apart from on certain capital items), but to this apparent downside, you pay a lot less to HMRC in the first instance and thus both your payments to HMRC and paperwork should decrease significantly! Now that is a scheme worth looking at........
Thursday, January 15, 2009
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I signed up to the flat rate scheme last year (2008) and hope to see the benefits at the end of my trading year. It was difficult to choose a business category from the HMRC Web site when signing up, so I chose a similar business type with, of course, the lowest rate. I didn't know about the 1% extra discount for the first year. I'm sure my accountant does!
ReplyDeleteHas the recent change in VAT rate affected the flat rate scheme and, if so, is it a 2.5% reduction or a proportional amount?
My favourite scheme is Annual Accounting - I only have to think about VAT once a year!! I suppose I could combine the two couldn't I?
ReplyDeleteThe Flat Rate percentages have been amended to reflect the change in VAT rate, the ready reckoner on HMRC's website is up-to-date with these. The rates will be proporationally lower rather than the whole 2.5%.
ReplyDeleteAs an aside. Last night's CIOT CPD session which John Crawford attended(the boss!)threw up an interesting issue on the Flat Rate Scheme with regards to the disposal of capital assets.
ReplyDeleteWhether to include a capital asset disposal within your Flat Rate income actually depends on what happened to the input VAT on the initial purchase.
If you recovered the input VAT on the capital expenditure (either before joining the scheme or under the £2k allowance) then the VAT must be accounted for on the disposal as a normal sale outside of the Flat Rate Scheme.
However, where no input could be recovered, the disposal is treated as income under the Flat Rate Scheme, even if the input VAT was not recovered because it was blocked by a Statutory Instrument (e.g. a car).
Therefore, if you sell a car, on which input VAT was blocked, this disposal will still have to be included in your Flat Rate turnover.
I'm struggling the choose the correct category for the provision of "HR Services". My guess is Management Consultancy but the lower rates of Business Services not identified elsewhere is attractive! What's your opinion on which category i should use?
ReplyDeleteIf a client has been on the flat rate scheme and stops trading, can they come off the scheme before they close the business so that they can claim the input VAT on my final accounting invoice?
ReplyDelete1. Our research does not reveal that the Flat Rate Scheme must be terminated before de-registration in order to claim input tax under the VAT 427 procedure.
ReplyDelete2. This query does raise one of the problems that must be overcome before a taxpayer uses the Flat rate scheme. It is worth noting that according to HMRC the VAT Flat Scheme has been introduced to simply VAT accounting. The scheme, can for some users, have a beneficial impact especially if input tax is minimal. Although we have not received much help from HMRC our experience in discussing these two categories with HMRC is that they consider the heading “other business services” as services actually supplied to businesses and not to the public. The heading “other activities not listed elsewhere” would cover other services supplied to the public not business. Therefore we would expect HR services would fall into “other business services” as they are supplied a business.
In respect of the decision making process some comfort is given in HMRC Notice 733 paragraph 4.2 headed What if I get the sector wrong? This paragraph states: -
“We will not normally check your choice of sector when we process your application. So if you have made a mistake you may pay too much tax or too little. Paying too little could mean that you are faced with an unexpected VAT bill at a later date.
However, if we approve you to join the scheme, we will not change your choice of sector retrospectively as long as your choice was reasonable. It will be sensible to keep a record of why you chose your sector in case you need to show us that your choice was reasonable.”
Clearly should you decide that your services fall into “other activities not listed elsewhere” detailed notes of the decision making process as well as contacting HMRC would assist in any defence. Some assistance in the Flat Rate Ready Reckoner can be found on HMRC website.
If VAT is charged on all your income but at a much lower rate. Does this mean that any services provided outside Uk (e.g. France) will be included in the turnover on whcih VAT will be calculated or will it falls in the "Outside the Scope" category?
ReplyDeleteI am taking an example of an author based in the UK, but selling his book in France. Will he have to calculate and pay VAT on all income received from France or should he ignore these income for VAT purposes under Flate Rate Scheme?
Depends somewhat on whether we are talking about the sale of goods (i.e. the physical book being sent from the UK) or whether we are talking about rights.
ReplyDeleteHowever, goods/the book would not be an outside the scope supply and thus is included in the FRS. If a lot of EU desptaches are made by this trader then the FRS is certainly not the most beneficial scheme for them.....