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This publication is available at https://www.gov.uk/government/publications/vat-notice-733-flat-rate-scheme-for-small-businesses/vat-notice-733-flat-rate-scheme-for-small-businesses
This notice cancels and replaces Notice 733 (April 2017). Details of the changes to the previous version can be found in paragraph 1.2.
Parts of this notice have the force of law under VAT Regulations 1995, regulations 55A-55V, 57A and 69A. These parts are indicated by being placed in a box as in this example.
The following rule has the force of law
If you receive a net payment, you must include the full value before such deductions (and including VAT) in your scheme turnover. This will usually be the value shown on your sales invoice.
For current information regarding the trade sectors and flat rate percentages see VAT Flat Rate Scheme – Flat rates for types of business.
1.1 What this notice is about
This notice explains the Flat Rate Scheme, who can use it and how to apply to join.
Many of the normal VAT rules apply to the Flat Rate Scheme. So if you cannot find the answer to your question in this notice, remember the basics of VAT can be found in VAT guide (VAT Notice 700).
1.2 Changes to this notice
Step 5 of paragraph 4.1 has been amended to clarify the process for choosing your flat rate sector.
2. Basics of the Flat Rate Scheme
2.1 The Flat Rate Scheme
The Flat Rate Scheme is designed to simplify your records of sales and purchases. It allows you to apply a fixed flat rate percentage to your gross turnover to arrive at the VAT due.
Fixed rate percentages vary depending on the type of business.
2.2 How this will help you
The main benefits of the scheme are:
- simplified record keeping, as you do not have to keep detailed records of sales and invoices
- fixed rate percentages that are lower than the standard rate
- it helps manage cash flow
2.3 Which businesses cannot use the scheme
Not every business will benefit from the scheme:
- if your customers are VAT registered you will have to calculate the VAT and issue VAT invoices in the normal way
- for businesses who buy and sell goods from outside the UK, the scheme may become more complex, (see paragraph 6.4)
- if you usually claim input tax, (see paragraph 2.4)
Also, as the flat rates are averages, you may pay more VAT on the Flat Rate Scheme than you would on normal accounting.
2.4 How the scheme affects input tax
If you use the Flat Rate Scheme, you do not recover input tax or VAT on imports or acquisitions, if your business is based in Northern Ireland. This is because the flat rates are calculated to represent the net VAT you need to pay to HMRC. In other words, an allowance for input tax is built into the flat rates.
There are special rules when you buy high value capital goods, section 15 explains how you can claim back the VAT on these purchases.
2.5 Who can join the scheme
The scheme is for businesses with a turnover of no more than £150,000 a year, excluding VAT. There are some additional rules to stop abuse of the scheme. If you want to know more section 3 explains the joining conditions in more detail.
The Flat Rate Scheme is a simpler method of working out the VAT you have to pay to HMRC and so is unsuitable where you regularly receive repayments from HMRC.
2.6 How to join the scheme
You can apply by post, phone or email, section 5 gives full details.
2.7 Combining the Flat Rate Scheme with other schemes
This table shows which other schemes you can use with the Flat Rate Scheme.
|Scheme||May be used with Flat Rate Scheme||Further information|
|Annual accounting||Yes||Combining the Annual Accounting Scheme with the Flat Rate Scheme can mean you spend less time working out how much VAT you owe, avoid a big bill by evening out your VAT over the year and submit only one VAT Return a year.
If you wish to join both schemes, Annual accounting (VAT Notice 732) contains a joint application form.
If you’re already using one of the schemes and wish to use the other, complete the form for the scheme you have not yet joined.
|Cash accounting||No||The Flat Rate Scheme has its own cash based method that is very similar to the Cash Accounting Scheme – see section 9.|
|Retail schemes||No||The Flat Rate Scheme has its own retail based method that is very similar to ordinary retail schemes.
If you want to leave a retail scheme to join the Flat Rate Scheme, simply follow the rules about ceasing to use the retail scheme in Retail schemes (VAT Notice 727).
|Margin Scheme for second-hand goods||No||If you sell a significant proportion of second-hand goods using margin schemes or the Auctioneers’ Scheme, the Flat Rate Scheme will be of limited value to your business. This is because the Flat Rate Scheme calculates VAT on the total received for your sale rather than on the margin.|
3. Eligibility and conditions of the scheme
3.1 Who can join
The Flat Rate Scheme is for small businesses. You can apply to use the scheme if:
- you’re eligible to be registered for VAT
- your taxable turnover (excluding VAT) in the next year will be £150,000 or less
- your business is not ‘associated’ with another (see paragraph 3.8)
3.2 Working out your taxable turnover
Leave out any anticipated sales of capital assets but include all of the following:
- the value of your standard rate, zero rate and reduced rate supplies
- your turnover from the sale of second-hand goods sold outside the Margin Scheme, see The Margin and Global Accounting Scheme (VAT Notice 718)
- any sales of investment gold that are covered by the VAT Act, Section 55 – see Gold acquisitions, imports and investments (VAT Notice 701/21)
Remember to leave out any VAT when doing this test.
3.3 Calculating your future turnover
You may forecast this in any reasonable way. If you have been registered for VAT for 12 months or more, the turnover declared on your returns may be a reasonable guide but take into account any expected changes. If you’re not VAT registered when you apply for the scheme, you may forecast your turnover by looking at:
- any period of trading before you apply
- the turnover of the previous business owner
- information on business plans or loan applications
3.4 If your future turnover rises above your forecast
If your forecast turns out to be too low, we will not penalise you provided there were reasonable grounds for what you forecast. So it is sensible to keep a record of the figures you used to calculate your future turnover.
If your forecast had no reasonable basis, HMRC may exclude you from the scheme immediately, or from the date your ineligible use began.
3.5 If your turnover rises after joining the scheme
You will cease to be eligible to use the scheme if the total value of your income for the year ending is more than £230,000.
However, if HMRC is satisfied that the total value of your income in the next 12 months will not exceed £191,500, you may be eligible to remain in the scheme.
These figures include VAT inclusive income of all taxable and exempt supplies.
See section 12 for further details about leaving the scheme.
3.6 Who cannot join the scheme
You cannot join the scheme if any of the following apply:
- you’re not registered for VAT
- you use the Second-hand Margin Scheme or the Auctioneers’ Acheme
- you’re required to use the Tour Operator’s Margin Scheme
- you’re required to operate the Capital Goods Scheme for certain capital items (see paragraph 15.6)
- you have stopped using the Flat Rate Scheme in the 12 months before the date of your new application
- in the 12 months before your application you have either:
- accepted a compound penalty offer or been convicted of an offence in connection with VAT
- been assessed with a penalty for conduct involving dishonesty
- you’re, or within the past 24 months have been, registered for VAT in the name of either a:
- VAT group (see paragraph 3.7)
- you’re, or within the past 24 months have been, eligible to join an existing VAT group treatment (see paragraph 3.7)
- your business is ‘associated’ with another one in the special way explained in paragraph 3.8
3.7 Using the scheme in a VAT group
If you’re part of a VAT group, or are eligible to join an existing VAT group, then you cannot use the Flat Rate Scheme. If you become eligible to join an existing VAT group after you join the scheme, then you must leave the scheme with effect from the date you become eligible.
VAT groups are for incorporated businesses which are linked to other incorporated businesses by common control or ownership. If your business has been eligible to join a VAT group in the last 2 years, but is not eligible at the time you apply, HMRC can let you use the scheme if they agree in writing that your former eligibility is not a risk to the revenue.
For details of eligibility to join a group see VAT Notice 700/2: group and divisional registration.
3.8 If your business is closely linked with another business
‘Associated’ businesses cannot join the Flat Rate Scheme.
If you’re unsure whether the particular relationship between your business and another constitutes ‘association’ then contact the VAT helpline.
You’re associated with another business in this special sense if:
- one business is under the dominant influence of another
- 2 businesses are closely bound by financial, economic and organisational links or another company has the right to give directions to you
- in practice your company habitually complies with the directions of another – the test here is a test of the commercial reality rather than of the legal form
If your business has been associated in this way with another in the last 2 years, but is not associated at the time you apply, HMRC can let you use the scheme if they agree in writing that your former association is not a risk to the revenue.
4. Determining your flat rate percentage
4.1 Choose which flat rate applies to your business
The flat rate you use depends on the business sector that you belong in. The correct sector is the one that most closely describes what your business will be doing in the coming year. From 1 April 2017 the flat rate changes if you’re a limited cost business.
The following steps may help you select the most appropriate sector for your business.
|Step||What you need to do||Please remember|
|1||See if your business will be a limited cost business. This is covered in paragraph 4.4||If you’re a limited cost business your flat rate percentage will be 16.5% regardless of your sector.|
|2||If you’re not a limited cost business, a list of businesses is available||The descriptions of the sectors are not technical and use ordinary English. They are what HMRC reasonably believes relate to business types. So if there is a match or a close fit, you can use that sector.|
|3||Check to make sure your business is not mentioned in a composite sector||Some of the sectors refer to more than one business type.|
|4||If there is not a sector that mentions your business, look at the sectors for ‘Businesses not mentioned elsewhere’||There’s one for retail, one for business services and one for manufacturing.|
|5||If you still have not found a sector you can use ‘Any other activity not listed elsewhere’||Only use this sector if your business does not fit with anything else.|
4.2 If you’ve chosen the wrong sector
If you have made a mistake choosing an incorrect sector you may pay too much tax or too little. Paying too little could mean that you’re faced with an unexpected VAT bill at a later date.
HMRC will not change your choice of sector retrospectively as long as your choice was reasonable. It will be sensible to keep a record of why you chose your sector in case you need to show HMRC that your choice was reasonable.
Some business activities can reasonably fit into more than one sector. So changing your sector does not automatically make your original choice unreasonable.
4.3 The trade sectors and flat rates
Information regarding the trade sectors and flat rate percentages can be found in VAT Flat Rate Scheme – Flat rates for types of business). You would use these rates if you’re not a limited cost business, see paragraph 4.4. If you’re a limited cost business you need to use 16.5%.
4.4 Limited cost businesses
These changes took effect on 1 April 2017. You should not use the limited cost business rate before this date.
If you’re a limited cost business, you should use the flat rate of 16.5%. There’s a simple calculator available to help businesses work out whether they’re a limited cost business, if you want to use the calculator, see the VAT Flat Rate Scheme – What you pay.
Before you start you’ll need some basic information, use the information that relates to your most recent VAT Return period. If you submit quarterly returns this will cover a 3-month period. If you submit annual returns this will cover a full year. You’ll need to know:
- your relevant turnover – this is explained in section 6
- the cost of goods – goods must be used exclusively for the purpose of your business and certain goods are excluded from this test, this is explained in paragraph 4.6
You’re a limited cost business if the amount you spend on relevant goods including VAT is either:
- less than 2% of your VAT flat rate turnover
- greater than 2% of your VAT flat rate turnover but less than £1,000 per year
If your return is less than one year the figure is the relevant proportion of £1,000. For a quarterly return this is £250.
For some businesses this will be clear, other businesses, particularly those whose goods are close to 2%, may need to complete this test each time they complete their VAT Return. This is because you can move from a limited cost rate of 16.5% in one period to your relevant sector rate in another. This would happen if your costs fluctuate above and below 2%.
If you’re a limited cost trader this means that you may pay more VAT than you do on standard accounting – you may want to check to make sure the Flat Rate Scheme is still right for you.
A business has a flat rate turnover of £10,000 a quarter. It spends £260 on relevant goods.
This is more than 2% of the flat rate turnover and more than £250 so the rate they need to use is the sector rate for their business.
A business has a flat rate turnover of £20,000 a quarter. It spends £325 on relevant goods.
This is more than £250 but less than 2% of the flat rate turnover so the rate they need to use is 16.5%.
A business has a flat rate turnover of £10,000 a quarter. It spends £225 on relevant goods.
This is more than 2% of the flat rate turnover but less than £250 so the rate they need to use is 16.5%.
4.5 VAT Returns that cover both before and after 1 April 2017
The low cost business rate came into force on 1 April 2017. You must split the return into 2 periods with the second period starting 1 April 2017. The test should not be done for the period before 1 April 2017. The calculation for the second period should not include any turnover or supplies from the first period.
If a quarterly return ends:
- 30 April 2017 – the portion of £1,000 that falls in the second period is £83
- 31 May 2017 – the portion of £1,000 that falls in the second period is £166
A business with a quarterly return ending 31 May 2017 has a turnover of £9,000 and relevant goods of £300. The return is split into 2 periods. No test is done for the first period. In the second period the turnover used is the amount received in the final 2 months, £6,000. The relevant goods figure is £200, the amount spent in the last 2 months.
This is more than 2% of the flat rate turnover and more than £166 so the rate they need to use is the sector rate for their business.
A business with a quarterly return ending 30 April 2017 has a turnover of £9,000 and relevant goods of £240. The return is split into 2 periods. No test is done for the first period. In the second period the turnover used is the amount received in the final month, £3,000. The relevant goods figure is £80, the amount spent in the last month.
This is more than 2% of the flat rate turnover but less than £83 so the rate they need to use is 16.5%. This rate only applies to the turnover in the second period. The rate they need to use in the first period is the sector rate for their business.
4.6 Relevant goods
You receive a supply of goods (including by import or acquisition) if the exclusive ownership of moveable items is passed to you from another person.
You also receive a supply goods if:
- your own goods are transferred from a country
- they’re transferred under an agreement where title will pass at a later time, such as a hire-purchase agreement
- receive water or any form of power, heat, refrigeration or ventilation but not if you hire in equipment which does this – that’s a supply of services (see Fuel and power (VAT Notice 701/19)
Relevant goods are goods that are used exclusively for the purposes of your business, but do not include:
- vehicle costs including fuel, unless you’re operating in the transport sector using your own, or a leased vehicle
- food or drink for you or your staff
- capital expenditure goods of any value, see paragraph 15.1
- goods for resale, leasing, letting or hiring out if your main business activity does not ordinarily consist of selling, leasing, letting or hiring out such goods
- goods that you intend to re-sell or hire out, unless selling or hiring is your main business activity
- goods for disposal such as promotional items, gifts or donations
- any services
Examples of relevant goods
This is not an exhaustive list:
- stationery and other office supplies to be used exclusively for the business
- gas and electricity used exclusively for your business
- fuel for a taxi owned by a taxi firm
- stock for a shop
- cleaning products to be used exclusively for the business
- hair products to use to provide hairdressing services
- standard software, provided on a disk
- food to be used in meals for customers
- goods provided by a subcontractor and itemised separately
- goods brought into the UK if they are not otherwise excluded
- goods bought without VAT being charged, if they are not otherwise excluded
Examples of supplies that are not relevant goods
This is not an exhaustive list:
- accountancy fees, these are services
- advertising costs, these are services
- an item leased or hired to your business, this counts as services, as ownership will never transfer to your business
- goods not used exclusively for the purposes of your business, for example electricity to supply a home and an office located in the home
- food and drink for you or your staff, these are excluded goods
- fuel for a car this is excluded unless operating in the transport sector using your own, or a leased vehicle
- electronic devices, such as a laptop or mobile phone for use by the business, this is excluded as it is capital expenditure, see paragraph 15.1
- anything provided electronically, for example, a downloaded magazine, these are services
- rent, this is a service
- software you download, this is a service
- software designed specifically for you (bespoke software), this is a service even if it is not supplied electronically
- goods which are bought solely to meet the test, as these would not be used exclusively for the purposes of your business, for example, if the quantity of goods being bought cannot reasonably be used by the business and are simply ‘stockpiled’ or thrown away, even if the business may normally use those items is smaller quantities such as office materials
- stamps and other postage costs, these are payments for services
4.7 Reduction of 1% for new VAT registrations
Under the Flat Rate Scheme arrangements, if you’re in your first year of VAT registration you get a 1% reduction in flat rate percentage. This means you can take 1% off the flat rate you apply to your turnover, until the day before your first anniversary of becoming VAT registered. The entitlement to apply the reduction runs for the 12 months following the date of registration for VAT and not the date you join the Flat Rate Scheme.
You will not be entitled to apply the 1% reduction if you register for VAT 12 months after you were required to do so.
If your business is a transfer of a going concern, you will be entitled to apply the 1% reduction from the date of the transfer.
A business registers for VAT on 1 April 2017. They’re a limited cost business and so use the flat rate of 16.5% from that date. From 1 April 2017 to 31 March 2018 it can use 15.5% if there are no changes to the business during this time.
A business registers for VAT on 6 January 2009 but does not join the Flat Rate Scheme until 1 July 2009 at a rate of 6%. From 1 July 2009 to 5 January 2010 it may use 5% if there are no changes to the business during this time.
A business registers for VAT on 1 March 2009 but does not join the Flat Rate Scheme until 1 May 2010. As the business has been registered for VAT for more than 12 months, it cannot apply the 1% reduction to its flat rate percentage.
A business becomes liable to be registered for VAT on 1 March 2009 but HMRC does not become aware of this liability until 1 June 2010. It cannot apply the 1% reduction to its flat rate percentage.
A business becomes liable to be registered for VAT on 1 April 2009 but HMRC does not become aware of this liability until 1 September 2009. The business can apply the 1% reduction from the date it joins the Flat Rate Scheme until 31 March 2010. If it joins the scheme with a start date of later than 31 March 2010, it cannot apply the reduction.
4.8 Businesses that fit into more than one sector
If your business includes supplies in 2 or more sectors, you must apply the percentage appropriate to your main business activity as measured by turnover. If the limited cost business rate applies you must use this rate, see paragraph 4.4. Choose the sector for which your business gets the greater part of its turnover. Do not split your turnover, or apply more than one percentage.
If a taxi business does some car repairs, it will have to decide which of the 2 activities will generate the larger amount of turnover and apply the appropriate flat rate percentage to the whole of its VAT inclusive turnover.
If the taxi part of the business expects to generate turnover of £40,000 (including VAT) in the next year, and the car repair part of the business expects to generate turnover (including VAT) of £15,000 in the next year, the business should apply the flat rate percentage for a taxi business to the total VAT inclusive turnover for both parts of the business.
4.9 Changes to the balance between parts of your business
If the balance changes but you continue to do all the same activities, carry on using the percentage that was appropriate at the start of the year until the anniversary of you joining the scheme. Review the balance between the parts of the business each year. Make this review for the first day of the VAT period in which the anniversary of you joining the scheme falls. If on that date the balance has changed, or you expect it to change over the year ahead, switch to the trade sector for the larger portion of your expected business.
This may also mean that your flat rate changes. If this occurs use the new flat rate from the start of the VAT period in which your anniversary falls, not just from the anniversary to the end of the period.
4.10 If you start or stop a business activity during the year
If you stop a business activity or start a new one during the year, you’ll need to check if the Flat Rate Scheme is still the better way to calculate your VAT. The change may mean you’re no longer eligible to use the – see paragraph 12.2.
If you’re still eligible to use the scheme, consider which business activity forms the larger part of your expected business. Do this in the way described in paragraph 4.8. Apply the appropriate percentage from the date of the change in your business until your next anniversary of joining the scheme, or the next change to your business, whichever comes first.
If you change flat rate percentages you must tell HMRC in writing within 30 days of the change taking place.
4.11 Changes to the flat rate
If the flat rate for your trade sector changes, you must use the new rate from the date of the change. A new table will be published in advance. In these circumstances you do not have to tell HMRC that you have started to use a different rate.
4.12 When you use 2 flat rates in 1 VAT period
Where a change in flat rate occurs in the middle of your VAT accounting period you’ll have to do 2 calculations for that period. The first calculation will be from the beginning of the period to the day before the start date for the new flat rate and the other from the start date to the end of the period. You’ll need to do this if your VAT Return includes 1 April 2017 on a day other than the start date and you’re a limited cost business at the end of the period. See paragraph 4.4 for information on limited cost businesses.
4.13 When a change of rate coincides with changes to your business
If the introduction of a new flat rate coincides with the day you would otherwise make a change to your business under the rules in paragraph 4.10, you should make the change as normal but use the new flat rate. If there is more than one change of flat rate in your accounting period (more likely for annual accounters), then you’ll need more than 2 VAT calculations for the period. Do each in the way outlined in paragraph 4.10. If you’re a limited cost business you’ll use the 16.5% rate, see paragraph 4.4.
5. Applying for the scheme
5.1 When you can apply
You can apply at the time you register for VAT, or any later time. If you apply near the time of your VAT registration, you can start using the scheme from the date you’re registered for VAT. Try not to delay your application if you wish to use the scheme from your date of registration.
5.2 How to apply
If you’re registering for VAT you can apply online.
Use the VAT600FRS Flat Rate Scheme application form.
Postal applications should be sent to the National Registration Unit.
Send questions or correspondence to the VAT helpline.
Call the VAT helpline.
5.3 How to fill in the application form
The VAT registration overview will help you through the online process.
These tables will help you to fill in the form. If you’re in doubt telephone the VAT helpline.
|Business name||Use your normal business name. If you’re already registered for VAT, this should be the name on your VAT Certificate of Registration.|
|Business address||This is your principal place of business. Again, if you’re already registered for VAT, this should be the address on your VAT Certificate of Registration.|
|Phone number||You do not have to give this, but it may help HMRC to process your application more quickly if they can phone you to clear up questions about your application.|
|VAT registration number||If you have not been advised of a VAT registration number, leave this blank. Make sure you send the scheme application to the same office as you sent the VAT1 Register for VAT.|
|Main business activity||Decide which of the sectors most accurately describes your business. If your business covers more than one sector, use the sector that is the main part of your business. Decide which is the main part by the amount of turnover each makes.|
|Flat rate percentage||This is the percentage for your sector as shown in section FRS7300 of the Flat Rate Scheme Manual. Insert the full flat rate for your sector even if you’re entitled to the 1% reduction.|
|Start date||This will normally be from the beginning of the VAT period after HMRC receives your application. They will confirm your actual start date in writing.
If you would prefer to start using the scheme from another date, write the date and reason in the box provided – see paragraph 5.5 for further information.
|Signature and date||The form should be signed and dated by the owner, a partner, or a director of the business that is applying. A signature is not required on an electronic application. Just type your name in the box.|
5.4 Keeping a copy of your application
Keeping a copy of your application is a good idea and will help if you have to contact HMRC about your application. Also note the office to which you send it.
5.5 When you can start to use the scheme
HMRC will notify you in writing if your application is successful. The letter will tell you the date you can start to use the scheme. This will normally be from the start of the VAT period following receipt of your application. If you request an earlier or later start date, HMRC will consider all the facts including the timing of your application and your compliance record. They will not normally allow you to go back and use the scheme for periods for which you have already calculated your VAT liability.
5.6 If you do not receive a reply to your application
HMRC will deal with your application under their Taxpayer’s Charter standards. If you do not hear from HMRC within 30 calendar days, contact HMRC where you sent the application to check that it has been received.
6. Determining your flat rate turnover
6.1 Working out your flat rate turnover
It is important to get this right. If you include items that are not part of the turnover, you will pay too much VAT. If you leave out items, you will pay too little VAT and could be assessed and have to pay a penalty and interest.
The turnover to which you apply the flat rate is all that you receive including the VAT.
There are 3 ways of calculating your turnover. They are:
|Basic turnover||This is principally for those who deal mainly with other VAT-registered businesses. If you’re used to accounting for VAT on an invoice basis, this can be the simplest to operate. For details see section 8.|
|Cash based turnover||This method is the Flat Rate Scheme equivalent of cash accounting. It is based, not on the time you make the supply, but on the time you’re paid for your goods or services. This can be helpful if you give extended credit or your customers pay you late. For details see section 9.|
|Retailer’s turnover||This is essentially the same as a Retail Scheme and is best if you’re a retailer selling goods to the public. For details see section 10.|
Whichever method you use, you must use that method for at least 12 months.
6.2 What to include in your flat rate turnover
Your flat rate turnover is all the supplies your business makes, including VAT. This means all of the following:
- the VAT inclusive sales and takings for standard rate, zero rate and reduced rate supplies
- the value of exempt income, such as any rent or lottery commission – these examples are not exhaustive and you can find out more about exempt income in VAT guide (VAT Notice 700)
- supplies of capital expenditure goods, unless they are supplies on which VAT has to be calculated outside the Flat Rate Scheme in accordance with paragraph 15.9
- the value of any dispatches to member states of the EU if your business is based in Northern Ireland
As exempt and zero rate supplies are included in your flat rate turnover you apply the flat rate percentage to the exempt and zero rate turnover. You may pay more VAT by being on the scheme if these supplies are a larger proportion of your business turnover than the average for your trade sector.
6.3 What income to exclude from your flat rate turnover
You exclude from your flat rate turnover:
- private income, for example, income from shares
- bank interest
- the proceeds from the sale of goods you own but which have not been used in your business
- any sales of gold that are covered by the VAT Act, Section 55 – see Gold acquisitions, imports and investments (VAT Notice 701/21)
- non-business income and any supplies outside the scope of UK VAT
- sales of capital expenditure goods on which you have claimed input tax
6.4 Special circumstances
Depending on the specific details of your business before you work out your flat rate turnover you may also need to take account of the following:
|If your business||then|
|purchases services from outside the UK to which the reverse charge applies||these supplies should be dealt with outside of the Flat Rate Scheme. Exclude them from your flat rate turnover but record them in boxes 1 and 4 of your VAT Return, as you would under normal accounting.
For more information about reverse charges, see VAT guide (VAT Notice 700).
|is partly exempt||you’re treated on the scheme as fully taxable and do not have to make any partial exemption calculations. You must, however, include your exempt income in your flat rate turnover.|
|incurs motoring expenses||you do not have to pay any road fuel scale charges since you’re not reclaiming any input tax on the road fuel your business uses.|
|sells second-hand goods||you can include these sales in your flat rate turnover, but you will pay more VAT than if you leave the scheme and use the Second-hand Margin Scheme.
Including second hand sales is the simplest option and if you only make occasional sales of second-hand goods you may consider this simplicity is worth the extra expense. You cannot, however, use the Flat Rate Scheme and the Margin Scheme at the same time.
You can find more about the second hand Margin Scheme in The Margin and Global Accounting Scheme (VAT Notice 718).
|is acting as an agent||if you pay amounts to third parties as an agent and debit your client with the precise amounts paid out, you may be able to treat them as disbursements. If you’re making such disbursements, then the money received for them is not part of your flat rate turnover.
For further information about disbursements see VAT guide (VAT Notice 700).
|Is based in Northern Ireland and sells goods to member states of the EU||include this income in your flat rate turnover.
If your business has a higher proportion of this type of sale than others in your trade sector you may find that operating the Flat Rate Scheme puts you at a disadvantage compared to your competitors.
|Is based in Northern Ireland and sells services to member states of the EU||if your supplies are outside the scope of VAT, leave them out of your flat rate turnover.
This will depend on the place of supply of the services – see place of supply of services (VAT Notice 741A).
|Is based in Northern Ireland and buys goods from member states of the EU||you must account for VAT on these acquisitions in box 2 of your VAT Return. Acquisition tax is payable at the standard rate of VAT and not at the flat rate.|
7. Keeping records and filling in your VAT Return
7.1 Keeping a VAT account
If the only VAT to be accounted for is the VAT calculated under the Flat Rate Scheme, just record that in the VAT payable portion of your VAT account. For further details of the VAT account see VAT guide (VAT Notice 700).
In some cases, however, you may have VAT to account for outside the Flat Rate Scheme, for example, the single purchase or disposal of capital expenditure goods of more than £2,000 in value. You should enter this in your VAT account in the normal way, in addition to your flat rate VAT.
7.2 Keeping special records
You should keep any special records for future reference.
This rule has the force of law
You must keep a record of your flat rate calculation showing:
- your flat rate turnover for the VAT accounting period
- the flat rate percentage you have used
- the tax calculated as due
- the amount you spend on relevant goods
This record must be kept with your VAT account.
7.3 Issue VAT invoices
You must still issue VAT invoices to your VAT-registered customers. Your customers will treat these as normal VAT invoices. When you come to calculate the scheme turnover, do not forget to include the VAT inclusive total of any invoices you have issued into the method of working out turnover that you’re using (see paragraph 6.2). You must keep copies of all sales invoices that you issue to your VAT-registered customers.
7.4 Calculate the VAT on sales invoices
Record VAT on your sales invoices using the normal rate for the supply (standard, reduced or zero rate or exempt) and not the flat rate percentage assigned to your trade sector. At the end of the VAT period you add up the VAT inclusive total of all your supplies whether you gave a VAT invoice or not and apply the flat rate percentage to this total to give the amount of VAT you must pay to HMRC.
7.5 Completing your VAT Return
Filling in your VAT Return is different on the scheme from the normal VAT rules because you’re calculating net tax without reference to output tax and input tax.
7.6 Recovering VAT paid before registration on goods and services
Record the claim for eligible VAT in your VAT account for your first VAT Return.
For details of the rules for claims see VAT Notice 700/1: should I be registered for VAT?.
If you do claim VAT on capital assets on hand at registration and dispose of them later, you must account for VAT at the standard rate of VAT under the normal VAT rules.
7.7 Common errors made on VAT Returns
- ‘None’ (or ‘£0.00’ for online returns) missed out of box 4
- forgetting to include exempt income, such as rent, in the turnover to which the flat rate is applied
- the VAT exclusive figure is put in box 6, meaning that the flat rate is applied to the net, rather than the gross turnover
- the 1% reduction is applied by businesses that have been registered for more than 12 months *failure to account for or include VAT on acquisitions if you’re registered for VAT in Northern Ireland
7.8 Preparing business accounts for Income Tax purposes while using the Flat Rate Scheme
It is expected that accounts for businesses who are using the scheme will be prepared using gross receipts, less the flat rate VAT percentage, for turnover and that expenses will include the irrecoverable input VAT.
For both VAT and Income Tax purposes, there is a requirement to keep a record of sales and purchases. But, for businesses using the scheme, that record does not have to analyse gross, VAT and net separately. The records need only be complete, orderly and easy to follow.
See How to fill in and submit your VAT Return (VAT Notice 700/12) for further details.
7.9 Paying your return
For details on paying your VAT Return see Pay your VAT bill.
If you use the Flat Rate Scheme and Annual Accounting Scheme together, then you must pay by electronic means. For further details on payment see VAT guide (VAT Notice 700).
7.10 Online VAT Returns
Virtually all VAT-registered businesses are required by law to submit their returns online and pay electronically. You will not have to do this if either of the following apply, HMRC is satisfied that:
- your business is run entirely by practising members of a religious society whose beliefs prevent them from using computers
- it is not reasonably practicable for you to use a computer to submit your returns, for reasons of age, disability or remoteness of location
If you think either of these apply to you then contact the VAT helpline to discuss alternative arrangements.
You will also not have to file returns online if you’re subject to an insolvency procedure – but if you have an approved Voluntary Arrangement you may submit online if you want to.
You can find out more about online VAT Returns.
7.11 Penalties that can apply to Flat Rate Scheme users
Surcharge is applied in the normal way if you send your return in late or pay any VAT due after the due date. For details see Default surcharge (VAT Notice 700/50).
Businesses with a turnover up to £150,000 are issued with a letter offering help and advice on how to avoid late returns and payments the first time they pay late.
If you make errors on your VAT Return, then you may be liable to a misdeclaration penalty as well as being assessed for any VAT and default interest due. See Misdeclaration and repeat misdeclaration penalties (VAT Notice 700/42) penalty and Default interest (VAT Notice 700/43).
8. The basic turnover method
8.1 Using the basic turnover method
Apply the flat rate percentage for your business to the VAT inclusive total of the supplies that have their tax point in the VAT accounting period.
Tax points are worked out using the normal VAT rules for time of supply. If you issue VAT invoices, this is often the date you issue an invoice. But in some circumstances it will be the date you receive payment, or the date you complete a service or make goods available to your customer.
The detailed rules which you must follow are in VAT guide (VAT Notice 700).
A special rule applies for certain invoices issued or payments received after 23 November 2016 and before 1 April 2017 – see paragraph 8.2.
8.2 Special rule for certain invoices issued or payments received after 23 November 2016 and before 1 April 2017
You only need to consider the following if you have issued an invoice or received a payment after 23 November 2016 and before 1 April 2017 in respect of a service to be performed on or after 1 April 2017.
The following rule has the force of law
If (a) you issue a VAT invoice in the period starting with 24 November 2016 and ending on 31 March 2017 and the invoice is in respect of services to be performed on or after 1 April 2017, or (b) if you receive any payment in respect of those services in that period, the supplies of those services shall, to the extent covered by the invoice or payment, be treated as taking place on 1 April 2017 for the purposes of ascertaining your relevant turnover. If the invoice or payment covers services to be performed in a period spanning 1 April 2017, an apportionment based on a fair and reasonable method should be made.
You issue an invoice on 1 March 2017 for a service which is to be performed in December 2017. You do not treat the service as being supplied on the date the invoice is issued. You must treat it as being supplied on 1 April 2017.
You issue an invoice for £10,000 on 1 December 2016 for services to be performed in February 2017, March 2017, April 2017 and May 2017. The work is spread evenly over the 4 months.
You need to apportion the invoice amount between the services performed before 1 April 2017 and the services performed on or after 1 April 2017. You must therefore include £5,000 in your VAT Return for the period in which 1 December 2016 falls and £5,000 in your return for the period in which 1 April 2017 falls.
You issue an invoice for £12,000 on 1 January 2017. This invoice covers services that will be supplied continuously for the whole of 2017. You must include £3,000 in your VAT Return for the period in which 1 January 2017 falls and £9,000 in your return for the period in which 1 April 2017 falls.
9. The cash based turnover method
9.1 Using the cash-based turnover method
Apply the flat rate percentage to the VAT inclusive supplies for which you have been paid in the accounting period.
A special rule applies for certain payments received after 23 November 2016 and before 1 April 2017 – see paragraph 9.7.
The following rule has the force of law
Cash (coins or notes): you receive payment on the date you receive the money.
Cheques: you receive payment on the date you receive the cheque, or the date on the cheque, whichever is the later. If the cheque is not honoured you do not need to account for the VAT. If you have already accounted for the VAT you can adjust your records accordingly.
Giro, standing order or direct debit: you receive payment on the date your bank account is credited with such a payment.
Credit or debit card: you receive payment on the date you make out a sales voucher for a credit/debit card payment (not when you actually get paid by the card provider).
9.2 Change of tax rate or insolvency
In these special circumstances, the basic turnover method tax point will determine the treatment of your supplies.
9.3 If you used cash accounting before joining the Flat Rate Scheme
You carry on as before. There is no need to pay the VAT your customers owe you when you change schemes. Include any payments you receive whilst using the Flat Rate Scheme in the total to which you apply your flat rate percentage. Cash Accounting Scheme (VAT Notice 731) gives information about the Cash Accounting Scheme.
9.4 If you received a payment ‘net of deductions’
The following rule has the force of law
If you receive a net payment, you must include the full value before such deductions (and including the relevant VAT) in your scheme turnover. This will usually be the value shown on your sales invoice.
Some examples of payments that you may receive that are net of deductions are:
- where commission has been deducted by your customer
- where commission or payment for expenses has been deducted by a factor or agent collecting money on your behalf
- where commission or payment for expenses has been deducted by an auctioneer selling goods on your behalf
- payments made by an employer or contractor who has deducted Income Tax
9.5 If you receive payments in kind (for example, barter, part exchange)
The following rule has the force of law
If you’re paid fully or partly in kind, such as by barter or part exchange, you must include the value including VAT in your flat rate turnover each time you make or receive a ‘payment’. You receive ‘payment’ on the date you receive the goods or services agreed in lieu of money.
You must account for VAT on the full value of the supply, which is the price, including VAT, which a customer would have to pay for the supply if they had paid for it with money only.
The general rules about payments in kind are in VAT guide (VAT Notice 700).
9.6 If you want to stop using the cash-based method
The following rule has the force of law
If at any time you stop using the cash based accounting method, you must account for VAT on all the supplies made by you while you were using the method for which payment has not been received.
The supplies must be included in your scheme turnover in the return for the period in which you cease to use the cash based method.
The only exception to this is if you cease to use the FRS, but immediately start to use the cash accounting scheme described in VAT Notice 731 Cash accounting. Any business that leaves the Flat Rate Scheme and immediately starts to use the Cash Accounting Scheme should apply the appropriate flat rate percentage to any supplies made while part of the Flat Rate Scheme when payment for those supplies is received.
9.7 Special rule for certain payments received after 23 November 2016 and before 1 April 2017
You only need to consider the following if you have received a payment after 23 November 2016 and before 1 April 2017 in respect of a service to be performed on or after 1 April 2017.
The following rule has the force of law
If you receive a payment in the period starting with 24 November 2016 and ending on 31 March 2017 and the payment is in respect of services to be performed on or after 1 April 2017 the supplies of those services shall, to the extent covered by the payment, be treated as taking place on 1 April 2017 for the purposes of ascertaining your relevant turnover. If the payment covers services to be performed in a period spanning 1 April 2017, an apportionment based on a fair and reasonable method should be made.
You receive a payment on 1 March 2017 for a service which is to be performed in December. You do not treat the service as being supplied on 1 March 2017. You must treat it as being supplied on 1 April 2017.
You receive a payment for £10,000 on 1 December 2016 for services which are to be performed in February 2017, March 2017, April 2017 and May 2017. The work is spread evenly over the 4 months.
You need to apportion the amount between the services performed before 1 April 2017 and the services performed after 1 April 2017. You must therefore include £5,000 in your VAT Return for the period in which 1 December 2016 falls and £5,000 in your return for the period in which 1 April 2017 falls.
You receive a payment for £12,000 on 1 January 2017. This invoice covers services that will be supplied continuously over the whole of 2017. You must include £3,000 in your VAT Return for the period in which 1 January 2017 falls and £9,000 in your return for the period in which 1 April 2017 falls.
10. The retailer’s turnover method
10.1 Retailer’s turnover method
This method is based on your daily takings. You record payments from your customers as you receive them (for example, through your till) and total the takings daily.
You calculate your daily takings using the guidance at paragraphs 10.2 to 10.7.
To work out your flat rate turnover, you then add to your takings any other items of income your business receives, including those from outside the retail environment. You may find it helpful to make weekly and monthly totals.
At the end of your VAT accounting period, you apply the flat rate percentage to your flat rate turnover for that period.
Examples of other items of income your business receives might be:
- rent from a flat above the shop
- installation or callout charges if they are invoiced for, rather than going through your till
- disclosed exempt charge for credit
10.2 What to include in your daily takings
The following rule has the force of law
You must include and record the following in your daily takings as they are received from your customers:
- debit or credit card vouchers
- Switch, Delta or similar electronic transactions
- electronic cash
10.3 What non-cash sales to include in daily takings
The following rule has the force of law
In addition to cash payments you must add the following to, and record in, your daily takings, on the day you make the supply:
- the full value of credit sales
- the cash value of any payment in kind for retail sales
- the face value of gift, book and record vouchers redeemed
- any other payments for retail sales
10.4 Deductions from your daily takings
Your till roll or other record of sales together with the additions constitutes your daily takings and it is this figure which you must start with when calculating your flat rate VAT. You may, however, reduce this daily takings figure with the amount of any of the following:
- void transactions – where an incorrect transaction has been voided at the time of the error
- illegible credit card transactions – where a customer’s account details are unclear on the credit card voucher and therefore cannot be presented and redeemed at the bank
- unsigned or dishonoured cheques from cash customers – but not from credit customers
- counterfeit notes
- where a cheque guarantee card is accepted incorrectly as a credit card
- acceptance of out of date coupons which have previously been included in the daily takings but which are not honoured by promoters
- supervisor’s float discrepancies
- till breakdowns – where incorrect till readings are recorded due to mechanical faults, for example a till programming error, false reading and till reset by engineer
- use of training tills – where the till used by staff for training has been returned to the sales floor without the zeroing of figures
- customer overspends using Shopacheck
- inadvertent acceptance of foreign currency – where discovered at a later time, for example, when cashing up
- receipts for goods or services which are to be accounted for outside the Flat Rate Scheme
- refunds given to customers in respect of taxable supplies to cover accidental overcharges or where goods are unsuitable or faulty
- instalments for credit sales
10.5 Making adjustments to your daily takings
If you wish to adjust your daily takings, the following rules apply.
The following rule has the force of law
- you must be able to provide evidence to support any adjustments to your daily takings figure
- if you make an adjustment but receive a payment later, the amount must be included in your daily takings
- you must not make any reductions from daily takings for till shortages that result from theft of cash, fraudulent refunds and voids or poor cash handling by staff
For further details about cash handling, see Point of Sale Retail Scheme (VAT Notice 727/3).
10.6 Other rules about daily takings
If you’re involved in part-exchange, sale or return, credit sales, deposits, vouchers, coupons, or other special transactions, you will have to make other adjustments to your daily takings. The Point of Sale Retail Scheme (VAT Notice 727/3) will help. The rules for these adjustments apply to businesses using the Flat Rate Scheme in the same way that they apply to businesses using the normal VAT system. If you’re in doubt then contact the VAT helpline.
10.7 Special rules for florists
Special rules apply if you’re a member of organisations such as Interflora, Teleflorist or Flowergram.
- you receive payment direct from your customer, you’re the sending member and must include the amount the customer pays you in your daily gross takings
- you deliver flowers ordered by customers at another florist, you’re the executing member and you must add the order value and the VAT shown, from the monthly agency self billed invoice, to your flat rate turnover – this will be the gross figure
- orders taken by you’re delivered by other florists, the invoice from the agency will show the value of these orders as a purchase figure plus VAT – the figures shown may be net or gross depending on which agency is used – the input tax is always shown but this amount cannot be reclaimed under the Flat Rate Scheme
11. Changes to your business
11.1 If your business grows
If your business grows but you remain eligible to use the Flat Rate Scheme you do not need to take any further action. You must check your turnover at least once a year on your anniversary of joining the scheme. If you’re expecting sales of £230,000 or more in the next month you should check that you do not exceed the ‘forward look’ test in paragraph 12.2(b).
11.2 If the increase to your turnover is a one-off
If, when you do your annual check you find that your turnover has gone above the £230,000 limit but you expect that your turnover in the next year will fall below £191,500 in the next year, you may be able to remain on the scheme with HMRC’s agreement. If you wish to remain on the scheme in those circumstances, apply in writing to the National Registration Unit.
You will need to demonstrate that:
- your VAT inclusive total turnover in the coming year will not exceed £191,500
- the increase was the result of unexpected business activity which has not occurred before and is not expected to recur – if you successfully tender for an annual contract that takes you over the threshold, this cannot be classed as unexpected
- the increase arose from genuine commercial activity
If, however, the increase occurred in such a way that you must leave the scheme in the circumstances described in paragraph 12.2(b), then you cannot remain on the scheme even if the 3 conditions are met.
11.3 If the nature of your business changes
If you change the nature of your business but remain eligible to use the Flat Rate Scheme, apply the appropriate flat rate percentage for the trade sector for the new type of business from the date of the change. You must write and tell HMRC about the change within 30 days of the date of the change. This should be recorded with your VAT account as explained in paragraph 7.2. You do not need to write to tell HMRC if you change to or from a limited cost business, see paragraph 4.4.
11.4 If a business change makes you ineligible to use the Flat Rate Scheme
If the change in your business results in you becoming ineligible to use the Flat Rate Scheme you must write and tell HMRC and start accounting for VAT in the standard way.
See paragraph 12.2 for the rules on what makes you ineligible to continue using the scheme and when you must leave.
12. Leaving the scheme
12.1 When you can leave the scheme
If you wish to leave the scheme you must write and tell HMRC. We would expect that most businesses will leave at the end of an accounting period. However, you may leave voluntarily at any time during an accounting period. HMRC will confirm the date you left the scheme in writing.
You must not account for VAT using the scheme after the date you left even if you have not yet received confirmation of the date you left the scheme. HMRC will agree to a date in the previous accounting period if you have not already submitted your return under the Flat Rate Scheme.
12.2 When you must leave the scheme
This table details circumstances that can cause you to become ineligible to continue using the scheme and the date on which you must leave the scheme.
|Reference||If you become ineligible because||then you must leave the scheme with effect from|
|(a)||At the anniversary of your start date your total income (including VAT) in the year then ending (excluding sales of capital assets) is more than £230,000.
Note: your total income is determined by the value of invoices you have issued (if you use the basic turnover method) or the actual payments you have received (if you use the cash based turnover method)
|for businesses on quarterly VAT Returns the end of the VAT period containing your anniversary, or
for annual accounters the end of the month after the month containing your Flat Rate Scheme anniversary, or the end of your current annual VAT period, whichever comes first.
|(b)||there are reasonable grounds to believe the total value of your income for the next 30 days alone will be more than £230,000 (excluding sales of capital assets),||the beginning of the period of 30 days.|
|(c)||you become a tour operator and have to account for VAT using the Tour Operator’s Margin Scheme,||the date you became a tour operator.|
|(d)||you intend, or expect, to buy assets that are covered by the Capital Goods Scheme (see paragraph 15.6)||the date your intention or expectation occurred.|
|(e)||you become eligible to join an existing VAT group treatment, or register in the name of divisions,||the date you become eligible or registered in divisions.|
|(f)||you become associated with another business in the way described in paragraph 3.8||the date you become associated.|
|(g)||you decide to account for VAT using the Second-hand Margin Scheme or the Auctioneer’s Scheme,||the beginning of the VAT period in which you decide to use either scheme.|
12.3 How often you need to check your turnover
You have to make sure that your turnover has not risen above the limit in paragraph 12.2(a) and (b) each year, on your anniversary of joining the scheme.
If your business is growing rapidly, you will need to check at least monthly that you do not become ineligible by virtue of the rule in paragraph 12.2(b).
12.4 If you deregister
If you deregister you leave the scheme the day before your deregistration date. You must account for output tax on your final VAT Return for:
- sales made on the last day of registration (which must be accounted for outside of the scheme)
- the value of any capital expenditure goods or any pre-registration stock, on which you recovered input tax at the time of registration and which are still on hand at the date of deregistration
If you use the cash based turnover method you must follow the rules at paragraph 9.6.
12.5 HMRC withdrawing you from the scheme
HMRC may withdraw the scheme at any time for the protection of the revenue. They will specify the date of withdrawal in a notice of withdrawal.
Additionally, if they withdraw the scheme because you were never eligible to use it, they will backdate the withdrawal to the time when you started to use the scheme and you will have to account normally for VAT from then.
12.6 Rejoining the scheme
If you meet the requirements again, you can rejoin. But you will not be eligible to rejoin for a period of 12 months.
12.7 After leaving the scheme
If you’re deregistering refer to paragraph 12.4. In general, moving to the normal VAT rules is straightforward but in some circumstances you may need to make extra adjustments to ensure your VAT Returns are accurate, this table gives details.
|you stop using the scheme in the middle of a VAT accounting period,||you must do 2 calculations when you complete your next VAT Return, the first calculation will be for the portion of the period you used the scheme, the other calculation will be for the rest of the period, using normal VAT rules.
This will give you 2 sets of figures for the period you stop using the scheme. Add these together when you complete your VAT Return.
|you use the cash based method under the Flat Rate Scheme and you do not move immediately to the Cash Accounting Scheme (see Cash Accounting Scheme (VAT Notice 731))||when you leave the scheme you must follow the rule described in paragraph 9.6.|
|you use the cash based method under the Flat Rate Scheme and you move immediately to the Cash Accounting Scheme (see Cash Accounting Scheme (VAT Notice 731))||when you leave the scheme you must follow the rule described in paragraph 9.6.|
|the value of your stock has increased while you have been on the scheme,||you may be eligible to recover additional VAT on stock which you have on hand when you leave the scheme – see paragraph 12.8.|
12.8 Stock on hand when you leave the scheme
You may be able to make a stock adjustment and claim input tax when you leave the scheme. Follow the steps in the table at paragraph 12.9 to find out if and how, you need to make an adjustment. To do this you will need to value your stock. You do not need to do a formal stock-take for the purpose of valuing your stock, but your figures must be reasonable. It makes sense to keep a record of how you valued your stock in case we query the figures.
12.9 Making a stock adjustment
Paragraph 12.8 explains circumstances in which you may be able to recover additional input tax when you leave the scheme if your stock of standard-rated items has increased. This is voluntary. The following table explains how you make the adjustment.
This table has the force of law
|Step||What you need to do||Example|
|1||Work out the VAT exclusive value of stock on hand on which you had recovered input tax before you joined the Flat Rate Scheme. (Remember, if you were previously on cash accounting, this will be based on stock you had paid for).||£10,000|
|2||Work out the VAT exclusive value of stock on hand on which you will be unable to recover input tax after you stop using the Flat Rate Scheme.||£20,000|
|3||Subtract the figure at Step 1 from the figure at Step 2. (If the figure at Step 1 is larger than the figure at Step 2, you will not be entitled to the adjustment. No further action is necessary).||£20,000 - £10,000 = £10,000|
|4||Multiply the result of Step 3 by the standard rate of VAT.||£10,000 × 20% = £2,000|
|5||Claim the VAT calculated at Step 4 in the VAT recoverable portion of your VAT account in the first return you make after leaving the Flat Rate Scheme.||£2,000 recoverable from HMRC as a result of FRS stock adjustment.|
13.1 Barristers using the Flat Rate Scheme
Barristers whose chambers use any of the methods of accounting for common expenses may use the scheme. However, those chambers using method 3 (sometimes known as the combination method) must follow the rules if they have any members using the Flat Rate Scheme. Chambers must ensure that input tax claims are apportioned and only relate to those barristers who are not on the scheme.
Chambers has 10 barristers, 2 of whom use the Flat Rate Scheme. The common fund has paid £12,000.00, including VAT, on goods purchased. If none of the barristers were using the scheme, they could have claimed £2,000.00 input tax.
However, as 2 of them use the Flat Rate Scheme the chambers must apportion the input tax. If 30% of the input tax is apportioned to the 2 barristers on the Flat Rate Scheme, the chambers, through the nominated member of the common fund, can only claim 70% (£1,400.00) of the VAT paid on the goods. This is the input tax relating to the 8 barristers not using the scheme.
The remaining 30% cannot be claimed as the 2 barristers using the Flat Rate Scheme have already had their input tax taken into account in their flat rate percentage.
13.2 Special records for barristers using the scheme
They must put in place a system that monitors the input tax claimed for common expenses. This system must contain records that show:
- the value of the original VAT invoice
- the amount and percentage of input tax claimed back by the nominated member for each VAT invoice
- how the input tax is apportioned to the individual barristers
- how the input tax reclaimed is calculated for each VAT invoice
The records of all members of chambers using the Flat Rate Scheme must be made available during a visit to the chambers by an officer from HMRC.
Barristers on the Flat Rate Scheme whose chambers use method 3 must ensure that the nominated member does not claim input tax on their behalf.
14. Bad debt relief
14.1 Claiming bad debt relief when using the Flat Rate Scheme
Bad debt relief arises if you account for and pay output tax on supplies for which you’re not paid later. The rules are explained in Relief from VAT on bad debts (VAT Notice 700/18) and these will apply to you.
If you use the basic or retailer’s turnover methods of flat rate accounting, you can claim relief on eligible supplies at the standard rate of VAT, rather than the flat rate. This is because the flat rate includes an allowance for input tax which only occurs if you have been paid by your customer. As you will not have been paid, you will not have had full credit for any input tax.
If you’re using the cash turnover method, the rule for claiming bad debt relief are different, as explained in paragraph 14.2.
14.2 Using the cash turnover method of accounting
If you use the cash turnover method of accounting you may be eligible for bad debt relief if you have:
- not been paid by your customer and it has been 6 months since you made the supplies
- not accounted for and paid tax on the supply
- written off the debt in your accounts
If you meet all these conditions, your claim will be for the difference between the VAT you charged to your customer and the amount you would have declared to HMRC had you been paid. As with businesses that use the basic and retailer’s methods, this is because your flat rate takes account of input tax that you would otherwise have been entitled to, if you had been paid by your customer.
You can make the adjustment as follows:
|Step||What you need to do||Example|
|1||Identify the VAT in the unpaid supply.||Total price = £1,200, VAT= £200|
|2||Calculate the VAT that would have been paid under the Flat Rate Scheme if your customer had paid you.
That is the total owed (including VAT) multiplied by your Flat Rate Scheme percentage.
|£1,200 × (say) 10% = £120|
|3||Subtract the sum of step 2 from the sum of step 1.||£200 - £120 = £80|
|4||Step 3 is your special allowance under the Flat Rate Scheme. Include it in your VAT account in your next return.||£80 is added to the VAT deductible portion of your VAT account and creates a claim or reduces the VAT payable.|
If you apply for bad debt relief on a supply made while using the Flat Rate Scheme you should make the adjustment, even if you have withdrawn from the scheme.
15. Capital expenditure goods
15.1 Definition of ‘capital expenditure goods’ on which input tax can be claimed
Normally, capital goods are those goods which are bought to be used in the business but are not used up by it, except through normal wear and tear over a number of years – for example a van, a computer or a bottling machine but not the fuel, printer paper or bottles that go into them.
Capital expenditure goods in the Flat Rate Scheme are capital goods that would fall into the definition, but also specifically exclude any goods bought to:
- incorporate into other goods for onward supply
- consume (or completely use) within 1 year
- generate business income by being leased, let or hired
- goods covered by the Capital Goods Scheme (see paragraph 15.6)
Nothing in this section allows a business using the Flat Rate Scheme to reclaim VAT on goods which it would not be able to claim under the normal VAT rules.
15.2 Reclaim of VAT on capital expenditure goods
If you use the Flat Rate Scheme, you can reclaim the VAT you have been charged on a single purchase of capital expenditure goods where the amount of the purchase, including VAT, is £2,000 or more.
You deal with these capital expenditure goods outside the Flat Rate Scheme. This means that you claim the input tax in box 4 of your VAT Return.
No VAT is claimable, as this input tax is already taken into account in the calculation of your flat rate percentage if the supply is:
- more than 1 purchase
- under £2,000 including VAT
- of services
15.3 Single purchase of capital goods
The normal VAT rules are used to determine whether any particular supply is one, or more than one, purchase and whether supplies are of goods or services.
Examples of a single purchase are:
- a computer package (computer, printer, camera, scanner, speakers, and so on) bought as 1 package is 1 purchase of capital expenditure goods – if the package costs £2,000 or more (including VAT) then input tax can be claimed
- items of kitchen equipment (a pizza oven, a fridge and a dishwasher) bought for a restaurant – if all the items are from 1 supplier at 1 time, then they count as 1 purchase of capital expenditure goods – if they are from 3 different suppliers or at 3 different times then they will be 3 purchases and each must be £2,000 or more (including VAT) to qualify for a reclaim of VAT
15.4 Goods and services
These are a:
- van leased or hired to your business, this counts as one continuous supply of services, as ownership will never transfer to your business
- van bought on hire purchase is a supply of capital expenditure goods because ownership will eventually transfer to your business – if this cost £2,000 or more (including VAT) then input tax can be claimed
- builder builds an extension to business premises supplying all materials and including their cost in their final bill – no VAT is claimable, as this construction is a supply of services, not of capital expenditure goods
15.5 Capital or non-capital goods
These are a:
- shopkeeper buys bricks, cement and fittings from their local builder’s merchant intending to employ a builder to convert them into an extension of the business premises – no VAT is reclaimable as bricks and so on, are not capital expenditure goods
- shop is bought freehold for a retail business to operate from – if a former owner has opted to tax the property, VAT will be payable on the purchase – as this is a purchase of capital expenditure goods, the input tax can be claimed
15.6 If you intend, or expect, to buy assets that are covered by the Capital Goods Scheme
If you intend, or expect, to buy such goods you must leave the Flat Rate Scheme and write and tell HMRC immediately. The Capital Goods Scheme applies to:
- computers and items of computer equipment with a VAT exclusive value of £50,000 or more
- land and buildings, civil engineering works and refurbishments of a VAT-exclusive value of £250,000 or more
For more information, see the Capital Goods Scheme (VAT Notice 706/2).
15.7 What if goods are bought to ‘lease, let or hire’
Where capital goods are bought with the intention of generating income from them either directly (for example, boats for hire on a boating lake, hire of bouncy castles or marquees) or indirectly (for example, company van used for deliveries during week and hired out at weekends), then they are not capital expenditure goods no matter how much they cost.
15.8 Apportionments for private use
To help simplify the Flat Rate Scheme, where VAT on capital expenditure goods is reclaimable, the intended use of those items is treated as wholly for taxable supplies.
This means that you do not apportion input tax to cover any planned private or exempt use of the goods. This is different to the normal VAT rules.
For example, if employees are allowed free use of the company van at weekends to move goods, or a business video camera is used free by a friend of the proprietor to video a family wedding, then there is no restriction of input tax or payment of output tax under the Flat Rate Scheme.
15.9 Output tax due on disposal of capital expenditure goods
Where you have reclaimed input tax on capital expenditure goods then, when they are eventually sold out of the business, you must account for output tax at the appropriate VAT rate for the sale (not at the flat rate).
A business on the scheme buys a delivery van for £6,000 including VAT of £1,000 and it is not used for anything else. As the van is capital expenditure goods, VAT can be reclaimed. When the business later sells or part exchanges the van, say for £2,000, it must account for the VAT on this amount at 20%, not at the flat rate.
If you have not claimed input tax on capital items, either by choice or because it was not allowed, you must include the sale of those items in your flat rate turnover.
16.1 If you disagree with HMRC’s decision about my use of the Flat Rate Scheme
You can ask HMRC to reconsider their decision. Write to the office with whose decision you disagree saying why you disagree. A different officer will review the decision.
You can ask an independent Tribunal to decide the matter if:
- HMRC refuses to authorise your use of the scheme
- HMRC removes you from the scheme
- you disagree the category and the flat rate percentage that applies to your business
There is more information about what to do if you disagree with an HMRC decision.
16.2 Using the scheme after an appeal
If you have appealed about HMRC’s decision to withdraw or refuse use of the scheme, you must not use the scheme until your appeal is resolved.
If you have appealed against any other matter, such as an assessment, HMRC will normally allow you to continue to use the scheme pending the outcome of the appeal.
17. Form VAT600FRS
You apply to join the Flat Rate Scheme using form VAT600FRS.
Your rights and obligations
Read Your Charter to find out what you can expect from HMRC and what we expect from you.
If you have comments or suggestions
If you have any comments or suggestions to make about this notice, write to:
HM Revenue and Customs
Indirect Tax Process Team
VAT Registration and Accounting Policy (VRAP)
1st Floor Regian House
This address is not for general enquiries.
For general enquiries call the VAT helpline.
Putting things right
If you’re unhappy with HMRC’s service, contact the person or office you’ve been dealing with and they’ll try to put things right.
If you’re still unhappy, find out how to complain to HMRC.
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