VAT Flat Rate Scheme

[emicen]

I have applied for it but it hasnt come through yet (as in I'm still operating under normal VAT).

My understanding goes:
Invoice at £A + VAT (invoice value = B)
VAT payable = B - (B / 1.11)

My flat rate being 11%.

Thus I have to pay the VAT man 9.91% of B rather than the old 17.5% of A.

I put basically nothing through as expenses so it works out better for me.

[Eric Mc]

Some numbers for you:

VAT Exclusive value of Sales Invoice - £1,000.00.
VAT at 17.5% £175.00
Total VAT Inclusive value of Invoice - £1,175.00

Business is on Flat Rate Scheme and its rate is 11%

The VAT it declares and pays to the VAT man is 11% of £1,175.00 i.e. £129.25.

The figure it enters in the "Outputs" Box on the VAT Return is NOT £1,000.00 (as it normally is for "normal" traders) but the VAT Inclusive amount of £1,175.00.

As for the trader who is operating Flat Rate within a group - he could be in trouble if he ever has a VAT Inspection.
You can see the possible problem.

Company A buys goods from Company B for £1,175.00 and claims back the £175.00 VAT in the normal way.
Company B (which is registered for Flat Rate VAT) only has to pay £129.25 to the VAT man - giving the "group" a VAT saving of £45.75.

That's why the VAT rules don't allow Flat Rate Registration when this type of cross charging between members of a group is going on.

[ginettag27]

I always did it correctly, but then again I had an accountant to do it for me!! Of course the odd time that I filled it out, I did fill it in correctly - as the "obvious" mistake by HMRC had already been pointed out!! i.e. the boxes aren't really geared up for flat VAT.

I found it useful as it removed a lot of the amibiguity and is it or isn't it allowable. Kept things simple for me and the VAT man

Of course the extra incentives (extra 1% to newly VAT registered companies - wonder how many keep on taking advantage of that - I couldn't as it came in whilst I'd already been VAT registered for some years) and the different bands do give rise to some confusion, but once it's been explained it's simple enough!



Not currently VAT registered anymore (I wish!!)

[biglepton]

cerbfan said:

I use it, makes me between 4 and 5k a year. Ideal if you are contracting and have little to no outgoings.

Same here - I used it for a business that had virtually no expenses and few large and fairly simple invoices. It was pretty much 6.5% extra profit in my pocket. The fixed rate VAT return is pretty simple - if I can do it, I would've thought most people could.

[Eric Mc]

Are you absolutely sure you are operating it correctly though?
Are you absolutely sure you are using the correct Flat Rate %?

[NoelWatson]

biglepton said:

cerbfan said:

I use it, makes me between 4 and 5k a year. Ideal if you are contracting and have little to no outgoings.

Same here - I used it for a business that had virtually no expenses and few large and fairly simple invoices. It was pretty much 6.5% extra profit in my pocket. The fixed rate VAT return is pretty simple - if I can do it, I would've thought most people could.

You must have a very favourable VAT rate!! I am on 13% flat rate and I reckon this gives me an extra 2.25%.

[Fittster]

As an IT contractor I was advised to use the flat rate scheme by SJD.

[thewave]

Everything you need to know about VAT here

http://customs.hmrc.gov.uk/channelsPortalWebApp/ch...

I've advised nearly all of my contractors to go on the FLS, and it's saving them between £200 to £600 per month.

I agree though, it's ludicrous, however, so was the 0% band on the first £10k profits on companies....so make the most of a good thing whilst it's there.

[Eric Mc]

Do you advise them of the appropriate Flat Rate % or do you let them find it out for themselves?

Do you check the Flat Rate they have selected and advise them if it is the correct one?

What do you do with clients who have mixed supplies?

[Terry Tibbs]

don't use it

didn't like the idea that we have to justify the rate and couldn't find an appropriate industry description to determine the rate

Prefer the discipline of cash accounting every quarter though it pains me to write the cheque

[Eric Mc]

I understand that the VAT authorities have a different, more detailed, list of Fixed Rates which is not in the public domain. This is rather worrying as, no doubt, this is the list they will use to check whether you are using the correct rate or not - rather than the list that the businessman/woman used when making their selection.

[Olf]

Eric Mc said:

I understand that the VAT authorities have a different, more detailed, list of Fixed Rates which is not in the public domain. This is rather worrying as, no doubt, this is the list they will use to check whether you are using the correct rate or not - rather than the list that the businessman/woman used when making their selection.

If thats true the PCG could be petitioned to get a copy under freedom of information...


eta not having a good day with posts and spelling!

Edited by Olf on Monday 14th January 10:33

[thewave]

Eric Mc said:

Do you advise them of the appropriate Flat Rate % or do you let them find it out for themselves?

Do you check the Flat Rate they have selected and advise them if it is the correct one?

What do you do with clients who have mixed supplies?

We choose for them, but we have to get the client to fill in a letter of engagement amendment, which basically states it's not our fault if it's the wrong one

Where we have been unsure, a call to HMRC asking for a percentage usually does the trick, and always ask for confirmation in writing from them!

[Eric Mc]

It was mentioned on an accountancy discussion forum a while back. I haven't seen any other reference to it so it may be just a rumour.

I would stongly recommend a read of VAT Flat Rate issues on www.accountingweb.co.uk - especially an article by Rebecca Bennyworth.

[touching cloth]

I would be interested in looking at the flat rate scheme as never seem to offset a huge amount each quarter, certainly feel we could benefit financially from it. However if it means a greater risk of being stung later when they judge that the wrong rate has been applied, then maybe not worth the headache - is there not a 100% surefire way to get them to confirm and agree a rate with you?

p.s Eric, just sent you a mail via PH as looking to switch accountants in next few months and hope you might be interested in a bit more business.

Edited by touching cloth on Monday 14th January 11:00

[thewave]

Eric Mc said:

It was mentioned on an accountancy discussion forum a while back. I haven't seen any other reference to it so it may be just a rumour.

I would stongly recommend a read of VAT Flat Rate issues on www.accountingweb.co.uk - especially an article by Rebecca Bennyworth.

I think i've seen that article.

I went on a seminar when we first heard of this, and it was highly informative with respects to 'dual' supplies, so thankfully we were aware of the potential problems from the beginning, although I'm sure as time goes by, there will be other problems arising.

[Eric Mc]

I've been to a few of her lectures over the years and she is very good.

[JustinP1]

Hi Eric,

Thanks again for the Ltd Co account templates, they are a great reference, and helped me double check that my own homemade format was correct. Yours does make more coherent sense though, I must admit!

The abbreviated accounts are useful as I was producing full before, but in speaking to Corporation Tax robots they tell me that they must have the full set anyway, this is right isnt it?


Back to the thread:

We have discussed this before, and I think we both agree it is a bodge job and an accident waiting to happen. It is kind of if you were working with a company and although their business have changed, they are thinking "Bloody hell, we have just printed out 100,000 copies of these we are going to bloody well use them!" and as such they send out their old stationary with a hand attached sticky label over the letterhead...

I am sure it would not be that difficult to produce a separate Flat Rate form!?

That said though, for a *simple* business it can work well in certain circumstances. In my position, all of my capital purchases have been made a while back, and my business runs with only a small amount of purchases day to day in value, but a lot of them!

Before it would take me a good 2-3 hours to go through a box of fiddly receipts for a couple of quid as well as using a formula to work out the VAT element of our income.

Now I just need to go through my bank statement and add up the maybe ten or twelve times I have paid in cheques in the quarter and times this by 8.5% to find the VAT payable. Takes me 4 or 5 minutes.

It has been a godsend for me, however we only do a single type of business and we are reasonably small. I think I am also happier that my VAT returns and records are 100% correct. *As long as I have the right percentage* which I am pretty sure I do, there is nothing much to get wrong. If I were to be investigated, as long as my turnover matched the VAT paid there is surely not much more to do.

I would rather that than an imaginary guy going through a pile of receipts to find a single one which is reclaimed when shouldnt have been or some other heinous crime.

[Eric Mc]

It's no coincidence that the upscaling of Flat Rate VAT (which has been around for many years) to make it more accessable to more traders coincided with an anouncement by Gordon Brown that they intended to reduce HMRC staff levels by 40,000.
HMRC claim that it is a Revenue neutral scheme. This is not so - or else many traders would not see tax savings when they move over to it.

However, it would be "revenue neutral" to the Exchequer if they offset the VAT lost in this scheme against the reduced wages bill of HMRC.

Once these people have left and the wages bills have reduced, HMRC will increasingly see the discrepancies between VAT being reclaimed by customers of Flat Rate businesses versus the VAT being paid over by Flat Rate businesses and realise they are losing out.

I give it four more years.

You are correct - the Full Accounts need to be submitted to HMRC with the Corporation Tax returns and computations. Abbreviated Accounts will not suffice for tax purposes.

Later on this year the new Companies Act will start to kick in so various disclosures and references in statutory accounts will start changing to reflect these legal changes. Any accounts templates you are using now will start to become obsolete and illegal fairly soon.

[JustinP1]

Eric Mc said:

It's no coincidence that the upscaling of Flat Rate VAT (which has been around for many years) to make it more accessable to more traders coincided with an anouncement by Gordon Brown that they intended to reduce HMRC staff levels by 40,000.
HMRC claim that it is a Revenue neutral scheme. This is not so - or else many traders would not see tax savings when they move over to it.

However, it would be "revenue neutral" to the Exchequer if they offset the VAT lost in this scheme against the reduced wages bill of HMRC.

Once these people have left and the wages bills have reduced, HMRC will increasingly see the discrepancies between VAT being reclaimed by customers of Flat Rate businesses versus the VAT being paid over by Flat Rate businesses and realise they are losing out.

I give it four more years.

You are correct - the Full Accounts need to be submitted to HMRC with the Corporation Tax returns and computations. Abbreviated Accounts will not suffice for tax purposes.

Later on this year the new Companies Act will start to kick in so various disclosures and references in statutory accounts will start changing to reflect these legal changes. Any accounts templates you are using now will start to become obsolete and illegal fairly soon.

I agree. As soon as I saw the scheme I realised that on a 'per customer' basis when you add the total cost of running the revenue, it might cost more to process some companies paperwork than it made as 'profit' for the revenue.

I guess it is the old rule of customers that 80% of customers cause 20% of hassle and 20% cause 80% of hassle. Except in this case there are thousands of companies who would have returns for less than a few hundred quid and a load more that are less than a few thousand - in fact this might only leave the top 5% to cover 80% or more of their 'income'.

It would make sense from a business/economics point of view to streamline the less profitable areas even if they lose a small amount of income and focus on extracting more from the customers with the largest turnover...