Chapter 12 The Flat-rate scheme Flashcards
12.1 Introduction
The flat rate scheme calculates VAT due at 14.5% of the total invoice (VAT inclusive)
12.2 Eligibility
A trader may join the scheme if the estimated taxable turnover (turnover eligible for VAT) is less than £150,000. The trader must leave the scheme if total tax inclusive turnover exceeds £230,000, however if income is likely to drop below £191,500 in the following year, they can get permission from HMRC to stay in the scheme. A trader also leaves the scheme if estimated income in the next 30 days exceeds £230,000.
12.3 Flat rate percentage
HMRC have estimated the percentage of VAT due compared to the VAT-inclusive turnover for different types of businesses. (see table on page 100 of textbook).
HMRC have introduced a further reduction of 1% off the normal flat rate percentages for businesses in their first year of VAT registration. The discounted rate lasts for one year from effective date of registration but only if the trader notified his liability to register for VAT on time and asked to use FRS from the date registered.
Limited cost tracker – a new flat rate applicable to cost trackers came into effect from 1 April 2017, businesses are limited cost traders where their VAT inclusive expenditure on relevant goods is either:
• Less than 2% of their flat rate turnover in a prescribed accounting period, or
• Greater than 2% but less than £1,000 per annum.
If they meet the conditions then it would be a limited cost business and it will need to use the 16.5% flat rate to calculate the amount of VAT.
The term relevant goods will also include:
• Goods owned by the business that are transferred from another EU member state to the UK
• Goods purchased by the business under a hire purchase or similar agreement where title to the goods transfer to the business at some point in the future
• Water, any form of power, heat, refrigeration or ventilation.
The relevant goods must be used exclusively for the purposes of the business. In notice 733 HMRC have provided a list of typical examples of what constitute relevant goods.
12.4 Turnover
The turnover which we apply the percentages includes all supplies made by a business. It includes exempt supplies and supplies of capital assets. We exclude non-business income, supplies outside the scope of VAT (international services) and any sales where the business has recovered input VAT. Turnover is either calculated on an invoice or cash accounting basis. The trader must raise invoices to customers in the customary way, charging VAT at the normal rate and no the flat-rate.
12.5 Costs
Generally input tax is not deductible under the FRS. However it is possible to deduct input tax in the following situations:
• Capital assets costing more than £2,000 – entitled to a full input VAT reclaim. When the asset is sold, they must account for the full VAT charge on that disposal.
• Pre-registration input tax – where a trader recovers pre-registration input tax, they can claim the input VAT
12.6 records and accounting
A record of the flat-rate calculation must be kept showing the flat-rate turnover for the VAT accounting period, the flat rate percentage used and the tax due. For businesses using FRS, HMRC expects annual accounts to be prepared using gross receipts less VAT paid to HMRC. Expenses should be shown inclusive of VAT as they would be for any unregistered business. This means any VAT savings as a result of using the FRS, will form part of the business profits and will therefore be charged to tax.
12.7 Ineligibility
Traders’ ineligible to join the FRS are:
• Traders who, within the past 2 years were part of a VAT group
• Traders closely associated with another person or two businesses are closely bound by financial, economic and organizational links.
12.8 Bad debt relief
The interaction between the FRS and bad debt relief is curious. The bad debt claim is still the normal VAT fraction, this is because the bad debtor would have repaid the same to HMRC under the bad debt rules.
Where the trader uses the flat rate cash accounting, they would have not paid any output tax over to HMRC as they have not been paid. If the debt goes bad, they recover the difference between what they would have paid over and the VAT shown on the invoice.
