The VAT flat rate scheme is offered to small businesses by HMRC. To use the vat flat rate scheme, the business must be VAT registered. Essentially, the business can work out VAT due solely on their gross sales turnover.
The business charges its clients the applicable rate of VAT on its sales, as per the VAT rating of the product being sold. Hence , sales invoices have VAT on on them for the buyer to reclaim output VAT and the rate indicated by the invoice
The business itself works out the VAT due to HMRC as a multiple of the gross sales value of vatable invoices for the VAT period and the vat flat rate scheme percentage. The Flat rate VAT percentage varies by business sector. The applicable rate will be confirmed by Hmrc on registration for the Flat rate scheme.
Ted items only
For illustrative reasons, a typical rate would be 15% on Gross sales. When issuing an invoice, a business on the vat flat rate scheme must show the net , vat and gross amounts separately on the invoice.
Example: company Great shops ltd registered on the vat flat rate scheme, sells standard rated items only, Vat rate 20%. However, the company’s flat rate percentage is 15%.
When great shops ltd sells a product for £120 cash received in full, the VAT invoice will show : net £100, vat £20, total £120.
The VAT due to HMRC on this individual transaction would be 15% x £120 = £18. It should be noted that there is no input tax deduction on expenses.
The £18 and the 15% do not appear anywhere on the invoice, the customer can reclaim the full £20 from HMRC if they are Vat registered or from outside the EU. Other factors not considered might apply.
Not all small businesses benefit from the vat flat rate scheme, and tax law changes from 2017 mean that businesses with limited costs might not benefit at all.
To explore further the issues raised in this article, please drop us a line we will be happy to go through the applicable facts with you. This article is not intended to represent financial advice.