The VAT Flat Rate scheme can be extremely helpful for businesses with a turnover under £150,000. Moreover, it’s possible to actually generate profit out of the scheme if the flat rate percentage applicable to your sector is particularly favourable.
For example, a journalist that pays 12.5% of gross sales as VAT each quarter, doesn’t have to report the costs of business purchases on the VAT return. However, there is an exception when buying assets that cost £2,000 or more.
Nevertheless, problems can arise with the VAT Flat Rate scheme when different sectors overlap. For example, software is grouped within computer and IT consultancy (flat rate 14.5%), but publishing (flat rate 11%) covers books, journals, newspapers and sound recordings. So, a business that publishes information online as well as software will have products that fall under publishing as well as computer and IT consultancy. The business owner must judge which products generate the majority of sales and describe this process for the HMRC guidance to review. We’re capable of helping you do this.
It’s worth noting if your business drops one type of activity completely, this may lead to a change in sector. So, using the example provided if the business generated most of their sales with computer and IT consultancy, but subsequently dropped this to favour publishing, the business owner would need to use the new flat rate percentage from the date the business activities changed until the next anniversary of joining the initial flat rate scheme. It’s crucial you tell HMRC in writing within 30 days if you change the flat rate you use, the date it changed, and why.
Our friendly team of experts can advise you in a number of areas to apply or change your Flat Rate. Contact us here.