The VAT Flat Rate Scheme as introduced 12 years ago to make life easier for small businesses and the inspectors who had to cope with their bad bookkeeping
The Scheme as it was
Under the Flat Rate Scheme you did not need to look as purchases. You just paid over to HMRC a flat rate %age of the income you had received. The rate was dependant on your industry. If HMRC thought your industry usually had a lot of vatable purchases then the industry rate was low. The rate was supposed to include a small incentive to encourage users. But depending on how typical your business was to your industry average per HMRC, then you could make money or seriously loose out.
From 1st April 2017 HMRC have attempted to stop people from making money using the Flat Rate Scheme. But the method they have chosen makes it much more complicated. Instead of just using your industry rate, you now have two possible rates to choose from – for each return you have to choose either the penalty rate of 16.5% or, if you qualify, then your industry rate.
To qualify to use your industry rate, you need to pass the limited costs test as follows:-
Limited Costs Test
Firstly take your flat rate VAT income for that return ( or part of the return after 1st April 2017), and determine 2%.
Then work out the minimum spend – being £1000pa apportioned for the period of your return after 1st April 2017 e.g £250 for Quarterly Returns from 30th June 2017, or £83 for a return for the quarter ended 30th April 2017
Which of these two is the higher. This is how much you have to spend on relevant goods in the period of your return after 1st April 2017 in order to qualify.
Now look at the purchases made in that period. Just the goods purchased, not the services. Also exclude food, travel and motor expenses. Large pieces of equipment have their own rules so are also excluded. Total these qualifying costs. Does this total exceed the qualifying spend limit. If so then you can use your industry rate for the return. If not then you have to use the penalty rate of 16.5%
Benefits still exist
You can just use the penalty rate, without doing the test. This keeps the simplicity of the original scheme. And you can still recover the VAT on your equipment when you spend over £2000 on one receipt.
You may even decide every now and then to top up stationery supplies and benefit from your industry rate for one return, but without the ongoing hassle. In the first year with the 1% discount this may also not be much of a loss.
Remember you can join the flat rate scheme if you do not expect you turnover to exceed £150,000 but you do not need to leave the scheme until your income exceeds £230,000
If you wish to deregister from Vat then you must show that your turnover in the last 12 months is below the deregistration threshold – currently £83,000. But UK VAT registration may still be beneficial for the prestige or because you are trading with or in Europe.
We here at Limelight are ready to help you make your decision, to do the ongoing calculations or to answer your queries.
Finally, if you do wish to change your registration then please advice HMRC and changed your software settings or defaults.