Let’s get something out in the open right now – VAT is not a scary word. VAT, or value added tax, is just another part of running a business in the UK. Most businesses in the UK who sell products have to be registered for VAT, and most who offer services as well too. It doesn’t matter if your customer is another business or a consumer, if your sales go over £85,000 a year, VAT is just a fact of life. But while you must pay VAT, the way you pay your VAT can be your choice. There are a couple of different schemes available, but one has had a lot of press recently, mainly because HMRC announced some major changes, which took effect in April of last year. So, let’s talk about the flat rate VAT scheme, and if it’s still the right option for your business.
What Is The Flat Rate VAT Scheme?
Under this scheme, you simply pay a percentage of your total turnover as VAT. The actual amount you pay depends on the type of business you run, as different industries have different flat VAT rates – you can find out what yours is here. However, using this model, you might end up overpaying or under-paying HMRC at times, so you may still be required to make a final payment or receive a refund. You’ll still have VAT on your invoices, but you don’t have to account for the VAT details of every purchase. But you can only use this scheme if your business has an annual turnover below £150,000.
So What Changed?
HMRC discovered that there were a lot of traders taking advantage of the flat rate scheme to make a profit, so they decided to introduce the idea of a ‘limited cost trader’ to the mix. This means that if you are using the flat rate scheme, you will be liable to pay a higher percentage of VAT if you meet certain criteria. They go on to define this as a business that buys only a few goods. So you are a limited cost trader if your spend on goods per quarter, including VAT, is:
- Less than 2% of your VAT inclusive sales for that quarter, or
- More than 2% of your VAT inclusive sales for that quarter, but less than £250
This figure should exclude the cost of:
- Food and drink for the business or its staff
- Capital expenditure
- Vehicles, vehicle parts and fuel (unless your business uses its own vehicles in the transport business, for example if you run a taxi firm)
If this applies to you, then you will need to check how much you’ve spent on goods each quarter and see how your figures compare to the ones above. If it turns out that you are a limited cost trader, then you will need to apply VAT at the 16.5% to your VAT-inclusive sales for that quarter when you’re working out how much to pay HMRC.
Working Out If Flat Rate Is Still Right For You
So, if your business is currently on the flat rate VAT scheme, you could end up having to pay out more in VAT if you’re a limited cost trader. In fact, if you’re a freelancer or a contractor, this is most likely the case, and you could end up paying over £300 extra in VAT per quarter by sticking with flat rate. But of course, it’s not all about cost. The flat rate scheme also offers a simple way to manage your VAT within minimal admin – something that is important for many business owners. So it’s a case of re-evaluating what you want from a VAT scheme, and trying to match that with one of the VAT schemes available. But before you go writing to HMRC to leave the flat rate scheme remember:
- If you leave the flat rate scheme, you won’t be able to re-join it for 12 months, so you need to be sure it’s the right move.
- To qualify to re-join, your business turnover needs to be below £150,000.
- The amount of time needed to prepare your VAT returns will likely go up, so if you’re using an accountant or bookkeeper, check how much extra they will be charging you.
- Are your current spending patterns normal, or are they out-of-the-ordinary? It might not be worth leaving the scheme if it’s just a few months of odd spending.
Ultimately, the decision to leave or remain with the flat rate scheme is up to you as a business owner. But that doesn’t mean you can’t have some help making that decision. At Accountwise, we are happy to provide you with a free tax and VAT review, to help you understand where you are now and what might be the best scheme for you in the future. Our experts will get to know your business and how you operate, so we can offer bespoke and unbiased advice on all of your VAT options. For more information, or to book your free consultation, just get in touch with one of the team today.