What is the Flat-Rate scheme?
The flat-rate scheme is an alternative way for businesses to calculate Value-Added Tax when they are filing their VAT return. When using the Flat-Rate scheme, a business calculates their turnover from the sales they have made (including the VAT charged to customers) and they pay a fixed percentage of this amount.
How does the Flat-Rate scheme differ from the Standard VAT Scheme?
Currently, if you are using the Standard VAT scheme, every time you file your VAT return you will be aware that you have to calculate the total amount of VAT that you have charged your customers and the total amount of VAT paid to suppliers, then work out the difference. The result is the amount owed to HMRC.
This is different under the Flat-Rate scheme. When a business applies the fixed percentage to their gross taxable sales, the result is the amount owed to HMRC.
What rate will I pay if I switch to the Flat-Rate scheme?
The flat-rate or fixed percentage you will pay under the flat-rate scheme depends on if you meet two particular criteria when you join the Flat-Rate scheme. These two conditions are as follows:
- Your business’s purchase amount and import value are higher than 2% of your turnover
- Your purchase amount or import value is higher than £250 per quarter
If you meet these two conditions, for the first year on the Flat-rate scheme your VAT rate will be 6.5%. In the second year this rate will then return to 7.5%.
If you do not meet these conditions, you will have to calculate VAT at the higher rate. For the first year this is 15.5%, and this is 16.5% from year two onwards.
Example of how to work out your Flat-Rate
Let’s say your effective date of being on the Flat-Rate scheme is January 1, 2018
- In the first quarter (January-March 2018) you make £10,000 in sales
- The import VAT paid is £50.00
- The value of imports is £300.00
2% of £10,000 sales = £200
Your FRS VAT rate would be 6.5% as the value of imports (£300) is higher than the 2% of sales (£200)
If your value of imports is lower than the 2% of sales, for example £100, the FRS rate would be 15.5%.
Example of how to use the Flat-Rate scheme when you are calculating VAT:
Let’s say your flat rate is 6.5%. The VAT owed can be calculated through working out the gross total of sales and taking 6.5% of this number.
For example:
Total (NET) sales = £10,000 (Excluding VAT)
VAT @ 20% = £2,000
Gross total of sales = £12,000
Multiply the gross sales by 6.5%:
£12,000 x 6.5% = £780
The amount you would owe to HMRC = £780
What is the criteria for joining the Flat-Rate scheme and how can I register?
If you want to register for the flat-rate scheme, you have to meet the following criteria:
- Your business needs to be VAT-registered
- Your VAT taxable turnover will be £150,000 or less in the next 12 months
When you have worked out whether you are eligible for Flat-Rate, you can join the scheme online or by filling in a VAT600 FRS form and sending it to the address that is listed on the form.
You can choose to leave the scheme at any time, but you must wait for 12 months before you can rejoin the scheme.
The Pros of the Flat-Rate Scheme
- Simplicity – it can help to simplify your VAT-reporting duties and make these a lot easier to complete
- Time-saving – You don’t have to spend as much time recording the VAT you charge on sales and purchases, giving you more time to focus on other tasks
- Improved cash flow – for example, when charging 20% VAT on sales, businesses will pay 7.5% to HMRC and keep the difference charged (12.5%) to improve business cash flow
- First year discount – if it has been less than a year since you registered for VAT, you will get a 1% reduction in your flat rate percentage up until the first anniversary of VAT registration
The Cons of the Flat-Rate Scheme
- Nothing to claim back – the Flat-Rate scheme does not allow you to reclaim any VAT from your purchases, unlike the Standard VAT scheme
- Zero-rated products don’t count – the Flat-Rate unfortunately applies to sales on products that have a zero VAT rating, whereas on the standard scheme these sales would have no VAT
- Unsuitable for businesses with high import duties – under FRS, you cannot deduct the C79 figure during the calculation of VAT
Is the Flat-Rate scheme right for me?
In conclusion, if you are running an online business, the Flat-Rate scheme is an option that should definitely be taken into consideration. This could be seen as a more suitable option, in comparison to the Standard VAT rate scheme, as it helps businesses to save time and improves your cashflow. The current flat rate for online retail businesses is only 7.5%, which is a comparatively low rate.
However, the Flat-Rate scheme does not suit every business and not all businesses will save money through the scheme – as detailed earlier in the article, if your business incurs a high amount of import VAT, it is advised that you don’t join the scheme. Alternatively, if your import duty is low, joining the FRS scheme could benefit you greatly. It is important to assess your business’s current situation and how much import duty you are paying before joining the scheme.
If you need any more advice on the Flat-Rate scheme or VAT, please contact us on 0191 378 0287 to speak to one of our advisors. Alternatively, you can drop an email to vatdurham@jpaccountant.com.
