Flat-rate scheme

With the VAT rate at 20% and having to be paid every quarter, you may find that it can be a substantial drain on your funds, especially if you don’t have many VAT purchases to offset against it. This is where the flat-rate scheme comes in.

What is the flat-rate scheme

The flat-rate scheme is where you pay VAT at a lower percentage of your VAT inclusive turnover. This means where you would pay 20% of the income before adding VAT, someone in the construction industry would pay only 9.5% but on the total income including the VAT. However if you are in the flat-rate scheme, you will be unable to claim back VAT on purchases as you can under the normal scheme, with an exception that we will discuss below.

Joining the flat-rate scheme

To join the flat-rate scheme your estimated VAT taxable turnover (excluding VAT) will need to be £150,000 or less, this includes income at different rates of VAT such as reduced rate and zero-rated products. Once in the scheme you can stay in until your total business income exceeds £230,000.

However you cannot join the flat rate scheme if you were in the scheme and left in the previous 12 months.

Pros and cons of the flat-rate scheme

Pros

The main advantage is that you no longer need to record the VAT that you charge on every sale and purchase as with normal VAT accounting. There is also 1% discount if it is also your first year of being VAT registered (this applies until your first anniversary of VAT registration). Having a set percentage across sales means you will always know how much takings you need to pay to HMRC.

Cons

You will find that if you make a lot of zero rated sales and/or make a large number of standard rated purchases, you may find that it is cheaper to stick to the standard scheme.

Flat-rate scheme percentages

As there are many different kinds of business, it is difficult to list them all down without taking up a considerable amount of space, but you can find out from either HMRC or by giving us a call. Bear in mind that the percentage is likely to change each year, so be sure to check each year to avoid making a mistake.

Invoicing with flat-rate scheme

On your invoices, you must show the amount of VAT that you would normally charge on standard rate (i.e. 20%).

Claiming back VAT on capital assets

The exception to the rule you cannot claim VAT back on purchases is that you can claim back VAT on a capital asset purchase if it has a VAT inclusive price of £2,000 or more. This may be more than one asset providing they are part of the same purchase, but cannot be anything you intend to lease, resale or use up in your business.

However if your asset costs more than £50,000 inclusive of VAT you must leave the flat-rate scheme. Remember that if you eventually sell the asset you must charge VAT at the standard rate.

If you require any more information on the flat-rate scheme, or feel you would like to discuss if this will be of benefit to you, please give me a call.

Mark

Advice on record keeping

It is important to keep records, so that organisations such as the Inland Revenue can be clear on how you received your income, and what income is taxable.

Multiple Bank Accounts

When you perform work, you know that you must raise an invoice for payment. Try to ensure this all gets paid into one main bank account so that all money can be easily accounted for. Record keeping is vital to ensure that when the Taxman or Vatman comes visiting, that he does not tax you on any unexplained income which cannot be tracked back to a sales invoice.

This situation could occur where a business account exists but amounts are paid into any number of other personal bank accounts. The genuine self employed income gets mixed up with other income and information to support income in those personal records is non-existent.

We’ve seen it happen and the Inland Revenue will want to try to tax you on this other income, if you cannot provide evidence as to what it is.

Sales Invoices

Each sales invoice raised for work done should have an invoice number. Ensure that the numbers follow on from each other and keep any that have been spoilt or had to be amended. If any are missing, the taxman will assume that you were paid in cash and that you immediately destroyed the missing invoices to reduce your income. Keep all invoice records even where you have had to make out a new invoice as a replacement.

Other Records

If you are in business it is a good habit to keep ‘other’ records, for example, diaries, quotes etc. also keep all personal bank statements and make a special note of any monies paid into these accounts and from where they came e.g. loans or gifts from family members. Record this as soon as possible after the event – it is always more difficult to remember details at a later date.

The Inland Revenue often treats unidentified amounts as additional income unless you can prove otherwise. This is a classic attack used by the Revenue to get their hands on your money.

If you really feel that record keeping is not your cup of tea, and would rather not worry about the hassle, then why not get us to do it for you?

If you are in doubt as to which records to keep, why not give me a call?

Mark