PLEASE NOTE: This article was correct at the date of going to press, but details and rates described are liable to change over time – please check the tax rate section of our newsletter for up to date details.
 

• taxable turnover does not exceed £100,000 and
• total turnover (including the value of exempt (eg rents) and non-taxable income) does not exceed £125,000.

Turnover for these purposes does not include proceeds from the sale of capital assets.

The turnover test applies to your anticipated turnover in the following 12 months. Your turnover may be calculated in any reasonable way but would usually be based on the previous 12 months if you have been registered for VAT for at least a year.

If you are not registered you may forecast your turnover by looking at:

• any period of trading before you join the scheme or registered for VAT
• the turnover of the previous business owner
• information in business plans or loan applications.

If you get your estimate wrong you will not be penalised provided you can show that there were reasonable grounds for the estimate.

To join the scheme you must apply using a form VAT600 and if you are not already registered for VAT you must submit a form VAT1 at the same time.

You may not operate the scheme until you have received notification that your application has been accepted and Customs and Excise will inform you of the date of commencement.

How the scheme operates

The VAT due is calculated by applying a predetermined flat rate percentage to the VAT inclusive turnover of the period. This will include any exempt supplies and it will therefore not generally be beneficial to join the scheme where there are significant exempt supplies.

There are 17 percentage rates to choose from according to the trade sector of your business. They range from 5% (eg food retail and children’s clothing) to 14.5% (eg computer and IT consultancy). The table at the end of the bulletin lists the percentages relevant for different trade sectors.

If your business falls into more than one sector it is the main business activity as measured by turnover which counts. You should review the position on each anniversary and if the main business activity changes or you expect it to change during the following year you should use the appropriate rate for that sector.

If you start or cease to carry on a particular business activity whilst remaining eligible for the flat rate scheme you should apply the appropriate rate following the change up until the next anniversary. You will also need to notify Customs and Excise of the change.

Although you pay VAT at the flat rate percentage under the scheme you will still be required to prepare invoices for customers showing the normal rate of VAT. This is so that they can reclaim input VAT at the appropriate rate.

Leaving the scheme

Having joined the scheme you may remain within it provided your total tax inclusive turnover does not exceed £150,000 in any year. This limit only applies once a year on the anniversary of joining the scheme. However if you believe at any point that your turnover in the next 30 days alone will exceed £150,000 you must leave the scheme.

If the increase in your turnover is due to a one-off transaction you may be able to remain in the scheme with the agreement of your local VAT Business Advice Centre. You will need to write to them and demonstrate that your turnover for the coming year will revert to below the threshold, that the increase arose from a genuine commercial activity and will not recur.

When is the scheme not available?

The flat rate scheme cannot be used if you:

• use the second hand margin scheme or auctioneers’ scheme
• use the tour operators’ margin scheme
• are required to operate the capital goods scheme.

In addition the scheme cannot be used if, within the previous 12 months, you have:

• ceased to operate the flat rate scheme
• been convicted of an offence connected with VAT
• been charged with a penalty for conduct involving dishonesty.

The scheme will clearly be inappropriate if you regularly receive VAT repayments.

How to calculate turnover

There are three methods of calculating the turnover for any VAT period:

• invoices (based on when the tax point occurs in line with normal VAT rules)
• cash (when payment is received)
• retailer’s turnover (based on ‘daily takings’).

Treatment of capital assets

The purchase of capital assets costing more than £2,000 (including VAT) may be dealt with outside the scheme. You can claim input VAT on such items on your VAT return in the normal way but if you do you must account for VAT on a subsequent sale of the asset at the normal rate instead of the flat rate.

Paying VAT under the scheme

Payment can be made by cheque, postal order or electronic means. The flat rate scheme may be used in conjunction with the annual accounting scheme. In this case, a condition of the annual accounting scheme is that payment is made electronically.

Records to keep

Under the scheme you must keep a record of your flat rate calculation showing:

• your flat rate turnover
• the flat rate percentage you have used
• the tax calculated as due.

You must still keep a VAT account although, if the only VAT to be accounted for is that calculated under the scheme, there will only be one entry for each period.

Will penalties and surcharges apply?

Normal penalties and surcharges will apply. However the Chancellor has announced that, in due course, automatic VAT penalties will not apply to businesses with turnover of up to £150,000. Instead such businesses are to be offered help and advice when they are late with their VAT payments.