Flat Rate VAT Scheme

What is the Flat Rate VAT scheme?

In a nutshell if you register for the Flat Rate VAT scheme, VAT is charged on your invoices, but you will only pay back to HM Revenues and Customs (HMRC) a lower rate than the current VAT threshold which is currently 20%.

For example:

If you Invoiced your client for, £4,000, you would charge VAT of £800 on this invoice. The total the client would then need to pay is £4,800. If your Flat Rate VAT percentage is 16.5% you would only be expected to pay HMRC £792, leaving you with a VAT profit of £8.

As you cannot claim VAT back on day to day purchases, this £8 “profit” is seen as compensation for the VAT you’re unable to claim. If you’re purchasing more than a few items per month your accountant may recommend you move to the standard VAT scheme.

What changes were made to the scheme in April 2017?

Before 2017 there were a numerous Flat Rate VAT bands which were based on your company’s  SIC code. Though these bands do still exist, most limited company contractors will fall into a new band that was created called a limited cost trader, which currently is 16.5%.

What is a limited cost trader?

A cost trader is a limited company that’s primary function is to trade services not goods. In HMRC terms this means in a quarter i.e. every 3 months their spend on applicable goods including VAT are either:

• less than 2% of its VAT-inclusive sales for that quarter,or
• more than 2% of its VAT-inclusive sales for that quarter, but less than £250

If you are classified as a cost trader your Flat Rate VAT Rate would be 16.5%.

What is classified as non applicable goods

When calculating your spend on goods, there are certain goods that are excluded from applicable goods, some examples of these are:

• Food and drink for the business or its staff
• Capital goods for example new equipment used in your business, such as a laptop
• Accountancy fees
• Any electronic purchases, such as software
• Office rent
• Marketing costs
• Vehicles, vehicle parts and fuel (unless your business uses its own vehicles in the transport business, for example if you run a taxi hire firm)

It is recommended you speak to your accountant to confirm if your purchase is included as an applicable good.

Flat Rate VAT rates for non cost traders

As of April 2018, the following rates would apply, if you’re not classified as cost trader. It is always recommended you speak to your accountant to confirm your VAT flat rate

Q&A on the Flat Rate VAT Scheme

Our team of Accountants answer some of the questions they are most frequently asked regarding the Flat Rate VAT scheme;

Can I still benefit from the 1% discount in year one?

Yes you can still benefit from the 1% discount from the point of VAT Registration.

How often does Dolan Accountancy retest my status as a cost trader?

We will check this each VAT quarter once you have sent through confirmation that FreeAgent is up to date for review.

How does Dolan Accountancy test my status?

We  will test your status for the quarter, if your VAT-inclusive goods purchases come out as less than 2% of your VAT-inclusive turnover, or if the VAT-inclusive goods purchases are more than 2% of VAT-inclusive turnover but less than £250, you’ll be a limited cost trader for that quarter.

If I was to purchase a new laptop for over £2,000 can I still claim back VAT?

You can reclaim the VAT charged on Capital expenditure goods where the amount of the purchase, including VAT, is £2,000 or more. However if the supply is:

• more than one purchase
• under £2,000 including VAT, or of services

If I subcontract out work, does this count as capital good?

Unfortunately, if you subcontract work out this is not classified as a capital good. If you are subcontracting then you may need to review and see if the flat rate scheme is best for you, as if you were on the standard scheme you will be able to reclaim the VAT on the subcontractor cost.

To find out more about the Flat Rate VAT Scheme or contracting please call Jaime on 01442 795100 or email jaime.thorpe@dolanaccountancy.com.