The Company Merchant Limited

 

VAT Flat Rate Scheme

This scheme is designed to reduce the cost of complying with VAT obligations by simplifying the way small businesses calculate their VAT. It is available to businesses who expect their VAT exclusive turnover in the next 12 months to be:

• No more than £150,000 taxable supplies, and

• No more than £187,500 total business income. This second test will be removed from 1 April 2009.

Taxable supplies are calculated by looking at the total of supplies at the positive and zero rates, excluding VAT and the value of any capital assets expected to be sold. Total business income includes taxable supplies, VAT and the value of exempt and other non-taxable income.

The flat rate scheme saves time by removing the need to calculate and record output tax and input tax in calculating the net VAT due to HM Revenue & Customs. The VAT in a period is calculated by applying the flat rate percentage to the tax inclusive business income for the period.

Following changes made in the 2008 Pre-Budget Report*, HM Revenue & Customs has published a table showing rates applicable to many business sectors. Some examples are:

Category of business carried on	Appropriate percentage
Retail of food, newspapers, confectionery	2
Retail of vehicles or fuel	5.5
Photography	8.5
Estate agency	9.5
Hairdressing	10.5
Legal services	12
Computer and IT consultancy	11.5

The flat rate to be used depends on which trade sector most accurately reflects any particular business. If a business includes supplies in two or more sectors, the percentage to be used is that appropriate to the main business activity as measured by expected turnover in the year ahead.

If you start to use the flat rate scheme within a year of becoming VAT registered, you can reduce the VAT by one percentage point until the first anniversary of your registration.

If you are making supplies to other VAT registered businesses, you give them a VAT invoice charging VAT at the normal rate for the supply (not the flat rate percentage).

Whilst the above information is provided in the utmost good faith and is believed to be correct at the time of publication, reliance on this information is done so at your own risk and neither Smith Emmerson nor The Company Merchant Limited can take responsibility for any consequence arising from the advice given.