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The 2002 Budget speech claimed that the new Flat Rate Scheme would benefit small businesses. While that may be true for some businesses, it is necessary to look at the circumstances of each individual business before making a decision. In general we expect the take up to be very low.
The Chancellor indicated an average saving in administration costs of £1,000 per business per year. That is something that each individual business must assess. A European Union (EU) requirement is that flat rate schemes do not collect less VAT than standard schemes, so for every winner taking up the scheme, the rates will have been set so that there is a loser.
A business which adopts the Flat Rate Scheme will still have to be aware of VAT regulations generally in order to decide whether or not they are still applicable under the Flat Rate Scheme.
H.M. Customs & Excise have published Notice 733 setting out the details of the scheme and including an application form.
To be eligible for the scheme a business must have a taxable turnover less than £100,000 per annum. A business which does adopt the scheme can remain in it until its turnover exceeds £150,000 per annum.
Flat Rate Percentages are determined by the nature of the main business activity, published within Notice 733. For example the rate for lawyers and legal services is 14.5%
A fully taxable business which does not adopt the scheme adds 17.5% VAT to its invoices, i.e. £17.50 on goods or services of £100 = total invoice £117.50. That business will remit the £17.50 (together with the output VAT on other invoices) to Customs & Excise at the end of it's VAT period, after deducting any input VAT incurred.
A lawyer adopting the scheme would remit VAT of £17.04 to Customs & Excise, calculated at 14.5% on £117.50, without having to record or being able deduct any input VAT except on Capital Assets with an invoice value of £2,000 or more.
If the lawyer in the above example bought a computer for £1,999 including VAT of £297.72 he would not be able to reclaim any input VAT on that purchase, but input VAT on Capital Assets costing £2,000 or more can be recovered. Buying a computer for £2,001 including VAT of £298.02 would enable him to record and claim input VAT recovery in the same way as a trader not using the Flat Rate Scheme reducing the actual cost to £1,702.98.
An eligible business should consider the cost of recording the input VAT and the potential administration saving, and compare that to the difference between it's actual input VAT and the notional "input VAT allowance" which is built into the Flat Rate Percentages.
See also VAT Planning, VAT Returns, VAT Bad Debt Relief, VAT Capital Goods Scheme, VAT Car Fuel Scale Charge, VAT Cars including Leased Cars, VAT Partial Exemption, VAT Registration Numbers, VAT Retail Schemes
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