So you charge your customer 17.5% VAT, and offer to pay it over to the VATman. “No, that’s OK”, he says, “I only want some of it, you can keep the rest”.
At this point the average small business owner would probably either conclude that he or she had finally overdone it on the work front or had died and gone to heaven. However, many small businesses are eligible to join a scheme where precisely this happens.
The VAT flat rate scheme is open to any business with a turnover below £150,000 per year. Once you are in, you can stay in unless and until your turnover reaches £225,000 per year. So you can be a pretty substantial business and still benefit from this scheme.
The scheme operates as follows:
1. You still collect the full 17.5% VAT on its sales from its customers.
2. You pay over a percentage of your VAT-inclusive turnover to HM Revenue & Customs at the end of the VAT quarter. There is a table of percentages applicable to specific businesses. If you start to use the scheme at the same time you register for VAT, you get a 1% discount on the percentage for the first 12 months of registration. This also applies if you start to use the scheme within a year of registering.
3. You do not reclaim any input VAT, except that on purchases of capital equipment costing at least £2,000.
It has the following advantages:
1. Simplicity. Your VAT return usually consists of one figure, calculated by applying the relevant percentage to your gross turnover.
2. In many cases, significant VAT savings. When it was first introduced, the scheme underwhelmed the small business community because the rates were set too high. A few years ago these were reviewed and reduced across the board, to make the scheme worthwhile for most small businesses. It is easy to do an exercise to see whether the scheme would be beneficial to your business.
3. You can register voluntarily specifically to use the scheme (this will only make sense if your customers can recover the VAT you charge them).
4. Careful planning for capital purchases can often ensure that you benefit from the ‘over £2,000’ rule mentioned above and recover input VAT on those purchases.
We have many clients who save hundreds of pounds each year as a result of using the scheme. An (admittedly extreme) example relates to a breakfast networking group with which I am involved. This is a not for profit membership organisation, charging £40 per month to its members. It has around 40 members, so its net annual income is around £19,200. It is under no obligation to be VAT-registered, as the turnover limit is £64,000.
The VAT flat rate for membership organisations is 5.5%. By voluntarily registering for VAT the organisation created the following position:
VAT charged to members £19,200 * 17.5% = £3,360
VAT paid to HMRC £22,560 * 5.5% = £1,241
VAT retained by organisation £2,119
In the first year of registration this amount was actually £2,345 because of the 1% discount on the flat rate. This pays for a very good social event each Christmas for the group. In my view we should invite a representative of HMRC to attend as a thank you, but this suggestion has sadly been vetoed.
No input VAT would have been recovered anyway, as the organisation would never have registered for VAT had the flat rate scheme not been available.
The 5.5% flat rate for membership organisations is admittedly very low, but there are a large number of trades where as a general rule the scheme proves beneficial, financially as well as in terms of simplicity of administration. Have you considered the flat rate scheme for your business?
Mark Simpson
3 July 2007
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