VAT flat rate scheme question.

[W4NTED]

Hi all,

I think my accountant is not sure of this one as I am not getting a concrete answer so thought I would get the help of the PH collective

My business venture (which has now crossed the VAT registration threshold and I am now registered for VAT) falls under the Flat Rate Scheme (FRS) of 7.5%. I have a few questions.

Do I have to apply 20% VAT to all the goods I sell or can I apply say 10% and keep a 2.5% margin for any expenses which I incur where I will be unable to claim back VAT as if I was on the regular VAT Scheme?

I don't have many expenses that incur VAT so the FRS is beneficial to me @7.5% but the problem is that if I increase my prices by 20% to include VAT my prices go up quite substantially which make my competitors prices more favorable for the consumer.

I will be in a much better position if I can add a marginal VAT increase of 10% to goods I sell rather than the full 20%.

Is there also an option to only charge the 7.5% to customers and then pay this back to the HMRC as usual?


My Accountant tells me I HAVE to charge 20% in full and this would be beneficial for me as I have an effective margin rate of 12.5% but this will be at the expense of lower sales as I am sure I shall lose business if I was to add 20% to everything I sell.

Any help appreciated....Thanks

Edited by W4NTED on Wednesday 16th September 17:11

[Alex]

You must charge the correct amount of VAT, which is usually (but not always) 20%.

Then on your VAT return, you enter the total sales *including* VAT in Box 6 (which confusingly says "excluding" VAT) and calculate the VAT to paid as 7.5% of that.

So your accountant is correct.

You could achieve what you want by lowering your ex-VAT prices and offsetting the discount against your VAT "profit".

[Amateurish]

If you want to only increase your prices by 10%, the simply discount the ex-VAT price by 8.33% then charge the normal 20% VAT.

[theboss]

As above... you charge VAT at the standard rate applicable to the goods/services, and then pay HMRC 7.5% of your gross (inc. VAT) turnover. Its a common misunderstanding that the flat rate is the element of VAT you return to HMRC, i.e. leaving 12.5% profit. The flat rate is always applied to gross turnover.

[JBM78]

If you have very few purchases on which you could claim input VAT, I'd be surprised if your VAT flat rate was 7.5%?

Remember that for a year after the date of VAT registration you can reduce your flat rate percentage by 1%.

[surveyor]

and don't forget it's based on % of gross turnover - i.e. sales + Vat.....

[sumo69]

Hmm - something doesn't stack up here: low inputs and only a 7.5% rate sounds wrong!

HMRC do not check the rate you use until an inspection - it is was incorrect you would not only have a large bill but fines and interest on top.

David

[Eric Mc]

The theory of the VAT Flat Rate Scheme is that it simplifies the operation of VAT for smaller traders. In some respects, it does do this. However, it is full of pitfalls to catch the unwary. You really do need to be 100% sure -

a) it is best for your business

b) that you use the correct Flat Rate appropriate for what your business does

c) you complete the VAT returns correctly

d) you are aware of the COMPLICATIONS introduced if you make sales that would normally be Zero Rate or VAT Exempt

[IATM]

surveyor said:

and don't forget it's based on % of gross turnover - i.e. sales + Vat.....

That is not correct.
Under the flat rate scheme you take the % of your total sales inclusive of 20% VAT

Also OP just to make it clear you do not have an "effective" margin of 12.5% as you cannot claim back VAT.
I have been on the flat rate scheme and just came off it. Its great as it keeps accounting easy but also give you some space financially.
When I done the maths it was better but not by a huge amount as you first seem to thing.

Edited by IATM on Thursday 17th September 14:07

[IATM]

IATM said:

surveyor said:

and don't forget it's based on % of gross turnover - i.e. sales + Vat.....

That is not correct.
Under the flat rate scheme you take the % of your total sales inclusive of 20% VAT

Also OP just to make it clear you do not have an "effective" margin of 12.5% as you cannot claim back VAT.
I have been on the flat rate scheme and just came off it. Its great as it keeps accounting easy but also give you some space financially.
When I done the maths it was better but not by a huge amount as you first seem to think.

Edited by IATM on Thursday 17th September 14:07

[surveyor]

IATM said:

surveyor said:

and don't forget it's based on % of gross turnover - i.e. sales + Vat.....

That is not correct.
Under the flat rate scheme you take the % of your total sales inclusive of 20% VAT

Also OP just to make it clear you do not have an "effective" margin of 12.5% as you cannot claim back VAT.
I have been on the flat rate scheme and just came off it. Its great as it keeps accounting easy but also give you some space financially.
When I done the maths it was better but not by a huge amount as you first seem to thing.

Edited by IATM on Thursday 17th September 14:07

That's what I was trying to say..l