VAT Flat Rate Scheme
Discussion
Are there any PHers using this in their business?
If so, are they sure they are applying it correctly?
I have yet to come across a single client who has opted for this method of accounting for VAT and who has actually completed their returns correctly or paid the correct VAT amounts.
It is a genuine dog's breakfeast of a scheme which is all too easy to misinterpret and get wrong.
If so, are they sure they are applying it correctly?
I have yet to come across a single client who has opted for this method of accounting for VAT and who has actually completed their returns correctly or paid the correct VAT amounts.
It is a genuine dog's breakfeast of a scheme which is all too easy to misinterpret and get wrong.
I am not a huge fan of it as it flies in the face of the way "normal" accounting for VAT works.
However, my main argument is that no-one seems to be applying it properly. Nearly every example of client's workings I've reviewed shows them committing fundamental errors. - like picking the wrong Flat Rate %, or applying the % against their VAT Exclusive Sales rather than their VAT Inclusive Sales, or entering the VAT Exlclusive Sales figure in the Outputs Box of the VAT return - instead of the VAT Inclusive amount.
However, my main argument is that no-one seems to be applying it properly. Nearly every example of client's workings I've reviewed shows them committing fundamental errors. - like picking the wrong Flat Rate %, or applying the % against their VAT Exclusive Sales rather than their VAT Inclusive Sales, or entering the VAT Exlclusive Sales figure in the Outputs Box of the VAT return - instead of the VAT Inclusive amount.
It can get very complicated - especially if the trader carries out a number of different activities. There has been recent case involving a pub/restaurant where the pub selected the wrong %.
If you follow the explicit instructions on the VAT return, you will definitely put some incorrect figures in the boxes. The wording on the normal VAT return is totally incorrect for those using Flat Rate - so, no, my clients aren't morons (on the whole) they were just followed what they were told to do on the Return. It just so happens that what it says on the Return is not appropriate for Flat Rate traders,
If you follow the explicit instructions on the VAT return, you will definitely put some incorrect figures in the boxes. The wording on the normal VAT return is totally incorrect for those using Flat Rate - so, no, my clients aren't morons (on the whole) they were just followed what they were told to do on the Return. It just so happens that what it says on the Return is not appropriate for Flat Rate traders,
I think that there are fundamental flaws to the system. The Fixed Rates were very badly thought out by the Revenue and they seem to give some traders who use the scheme a big advantage over those who don't (or can't). That wasn't its original purpose. It was to simplify the book-keeping requirements for small businesses, not to give them an economic advantage over their competitors.
I have a supiscion that it will be reviewed at some point in the future with a view to evening out the discrepancies between the two systems.
For the moment though, it is well worth looking at as certain activities really do seem to come out very well from the scheme.
I have a supiscion that it will be reviewed at some point in the future with a view to evening out the discrepancies between the two systems.
For the moment though, it is well worth looking at as certain activities really do seem to come out very well from the scheme.
I also know that VAT Officials are very unclear of the way the scheme operates - and therefore are giving bad or incorrect advice. One of my clients recently had a VAT Inspection and the Inspector recommended that the one of his businesses go over to the Flat Rate Scheme. This was downright wrong as you cannot use the Flat Rate Scheme when you have two or more interlinked VAT trading entities and the turnover of obe or both exceeds the scheme threshold.
I think the whole thing is a total minefield and achieves the exact opposite of what was originally intended i.e. simplification..
I think the whole thing is a total minefield and achieves the exact opposite of what was originally intended i.e. simplification..
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.
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.
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.
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 would stongly recommend a read of VAT Flat Rate issues on www.accountingweb.co.uk - especially an article by Rebecca Bennyworth.
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.
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.
Domi - if you are on Flat Rate you are still allowed to claim the VAT on Capital Expenditure over £2,000. You do not have to come off the scheme.
The main proviso is that if you can claim back the VAT on this over £2,000 Capital Expenditure, whenever you sell this equipment (whatever it is), you MUST declare and pay to the VAT man VAT at the full 17.5% on the VAT Exclusive sale price.
In other words, that sale falls outside the Flat Rate Scheme.
The main proviso is that if you can claim back the VAT on this over £2,000 Capital Expenditure, whenever you sell this equipment (whatever it is), you MUST declare and pay to the VAT man VAT at the full 17.5% on the VAT Exclusive sale price.
In other words, that sale falls outside the Flat Rate Scheme.
Edited by Eric Mc on Tuesday 15th January 15:51
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