Flat Rate Scheme for small businesses

HMRC Reference:Notice 733 (April 2014) View Change History
 

Contents

Foreword

1. Introduction

1.1 What is this notice about?

1.2 What has changed?

2. Basics of the flat rate scheme

2.1 What is the flat rate scheme?

2.2 How will it help me?

2.3 Will all businesses benefit?

2.4 What about input tax?

2.5 Who can join the scheme?

2.6 How do I join?

2.7 Can I combine the flat rate scheme with other schemes?

3. Eligibility and conditions of the scheme

3.1 Who can join?

3.2 How do I work out my taxable turnover?

3.3 How do I know what my future turnover is going to be?

3.4 What if my future turnover rises above my forecast?

3.5 What if my turnover rises once I have joined the scheme?

3.6 Who cannot join the scheme?

3.7 Can I use the scheme if I am in a VAT group?

3.8 What if my business is closely linked with another business?

3.9 I have a close connection with another business - does this mean we are ‘associated’?

4. Determining your flat rate percentage

4.1 Which flat rate applies to my business?

4.2 What if I get the sector wrong?

4.3 The trade sectors and flat rates

4.4 Business activities that are the source of common enquiry

4.5 Reduction of 1 % for new VAT registrations

4.6 What if my business fits into more than one sector?

4.7 What if the balance between parts of my business changes?

4.8 What if I start or stop a business activity during the year?

4.9 What if there is a change of flat rate?

4.10 How do I deal with two flat rates in one VAT period?

4.11 What if the change of rate coincides with changes to my business?

5. Applying for the scheme

5.1 When can I apply?

5.2 How can I apply?

5.3 How do I fill in the application form?

5.4 Do I need to keep a copy of my application?

5.5 When can I start to use the scheme?

5.6 What if I don’t receive a reply to my application?

6. Determining your flat rate turnover

6.1 How do I work out my flat rate turnover?

6.2 What must I include in my flat rate turnover?

6.3 What income do I exclude from my flat rate turnover?

6.4 Special circumstances

7. Keeping records and filling in your VAT return

7.1 Must I keep a VAT account?

7.2 Do I need to keep any special records?

7.3 Do I still need to issue VAT invoices?

7.4 How do I calculate the VAT on these invoices?

7.5 How do I fill in my VAT return?

7.6 Can I recover VAT paid before registration on goods and services?

7.7 Common errors made on VAT returns

7.8 How do I prepare business accounts for income tax purposes while I am using the flat rate scheme?

7.9 How do I pay my return?

7.10 Online VAT returns

7.11 Can penalties apply to flat rate scheme users?

8. The basic turnover method

8.1 How do I use the basic turnover method?

9. The cash based turnover method

9.1 How do I use the cash based turnover method?

9.2 Change of tax rate or insolvency

9.3 What if I used Cash accounting before joining the flat rate scheme?

9.4 What if I receive a payment ‘net of deductions’?

9.5 What if I receive payments in kind (for example, barter, part exchange)?

9.6 What if I want to stop using the cash based method?

10. The retailer’s turnover method

10.1 What is the retailer’s turnover method?

10.2 What do I include in daily takings?

10.3 What non-cash sales do I include in daily takings?

10.4 May I make any deductions from my daily takings?

10.5 What are the rules for making adjustments to my daily takings?

10.6 Are there other rules about daily takings?

10.7 Special rules for florists

11. Changes to your business

11.1 What if my business grows?

11.2 What if the increase in my turnover is a one-off?

11.3 What if the nature of my business changes?

11.4 What if a business change makes me ineligible to use the flat rate scheme?

12. Leaving the scheme

12.1 When can I leave the scheme?

12.2 When must I leave the scheme?

12.3 How often do I have to check my turnover?

12.4 What must I do if I deregister?

12.5 Can you withdraw the scheme from me?

12.6 Can I rejoin the scheme?

12.7 What must I do after leaving the scheme?

12.8 What do I do about stock on hand when I leave the scheme?

12.9 How do I make the stock adjustment?

13. Barristers

13.1 Can barristers use the flat rate scheme?

13.2 Do barristers using the scheme have to keep special records?

14. Bad debt relief

14.1 Can I claim bad debt relief if I use the flat rate scheme?

14.2 What if I use the cash turnover method of accounting?

15. Capital expenditure goods

15.1 Definition of ‘capital expenditure goods’ on which input tax can be claimed

15.2 Reclaim of VAT on capital expenditure goods

15.3 What counts as a single purchase of capital goods?

15.4 What counts as goods and services?

15.5 What counts as capital or non-capital goods?

15.6 What if I intend, or expect, to buy assets that are covered by the capital goods scheme?

15.7 What if goods are bought to ‘lease, let or hire’

15.8 Apportionments for private use

15.9 Output tax due on disposal of capital expenditure goods

16. Appeals

16.1 What if I disagree with your decision about my use of the flat rate scheme?

16.2 Can I carry on using the scheme if I have appealed?

17. Form VAT 600 FRS

Your rights and obligations

Do you have any comments or suggestions?

Putting things right

How we use your information

 

Foreword

This notice cancels and replaces Notice 733 (May 2013). Details of the changes to the previous version can be found in paragraph 1.2 of this notice.

The legal basis for the flat rate scheme is in the VAT Regulations 1995, regulations 55A-55V, 57A and 69A. Parts of this notice have the force of law under those regulations. These parts are indicated by being placed in a box as in the example shown below.

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.


1. Introduction

1.1 What is this notice about?

This notice describes the flat rate scheme for small businesses.

Section 2 gives an overview to help you decide whether the scheme can help your business.

If you decide the scheme may help your business the rest of the notice contains the detailed rules on operating the scheme and explains how to apply.

Many of the normal VAT rules apply to the flat rate scheme. So if you can’t find the answer to your question in this notice, remember the basics of VAT can be found in Notice 700 The VAT Guide.

1.2 What has changed?

This revised notice replaces the May 2013 edition. The changes are:

  • Paragraph 5.2 - change of email address

You can get details of any changes to this notice since March 2007 either on our website, go to hmrc.gov.uk or by phoning our VAT Helpline on 0300 200 3700.

This Notice and any others mentioned in the text are available both on paper and on our website.

Those parts of this notice that have the force of law are marked clearly.

2. Basics of the flat rate scheme

2.1 What is the flat rate scheme?

The flat rate scheme is designed to help small businesses by taking some of the work out of recording VAT sales and purchases. If you use the scheme you apply a single percentage to your turnover in a VAT period. The result is the VAT you pay to HM Revenue & Customs (HMRC).

2.2 How will it help me?

The main benefit of the scheme is the time saved recording VAT on sales and purchases. This can also take some of the stress out of completing VAT returns at the quarter end. And because you can easily calculate how much VAT you owe on takings, it can help you to manage cash flow.

2.3 Will all businesses benefit?

Not every business will enjoy all the benefits of the scheme. For example, if your customers are VAT registered you will have to calculate the VAT and issue VAT invoices in the normal way. Businesses who buy and sell goods from outside the UK can find the scheme more complex and if you do this make sure you understand the rules in 6.4.

Also, as the flat rates are averages, some businesses using the flat rate scheme may pay more VAT than they would on normal accounting.

2.4 What about input tax?

Input tax is the VAT charged to you by other businesses. Under normal VAT accounting, you claim this back from us on your quarterly VAT return. If you use the flat rate scheme, you do not recover input tax or VAT on imports or acquisitions. This is because the flat rates are calculated to represent the net VAT you need to pay to us. 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 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 us and so is unsuitable where you regularly receive repayments from us.

2.6 How do I join?

You can apply by post, phone, or email. Section 5 gives full details.

2.7 Can I combine the flat rate scheme with other schemes?

The table below 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
  • submit only one VAT return a year.

If you wish to join both schemes, Notice 732 Annual accounting contains a joint application form.


If you are 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 but


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 but


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 Notice 727 Retail schemes.


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 there are reasonable grounds for believing that your taxable turnover (excluding VAT) in the next year will be £150,000 or less.

3.2 How do I work out my 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 Notice 718 Margin schemes, and
  • any sales of investment gold that are covered by the VAT Act, Section 55. See Notice 701/21 Gold.

Remember to leave out any VAT when doing this test.

3.3 How do I know what my future turnover is going to be?

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 are 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, or
  • information on business plans or loan applications.

3.4 What if my future turnover rises above my 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, we may exclude you from the scheme immediately, or from the date your ineligible use began.

3.5 What if my turnover rises once I have joined the scheme?

You may stay in the scheme provided your total income (including VAT) for the year just gone has not risen above £230,000. Make this check on each anniversary of your business joining the flat rate scheme. You must leave the scheme if your turnover increases so that there are grounds for believing that the total value of your income will rise above £230,000 in the next 30 days alone.

Important note: you become eligible for the scheme based on the level of your taxable turnover, but the test of continuing eligibility for the scheme is based on all income (including exempt income). This could mean that, if you have a very high level of exempt income, in extreme cases you could be eligible to join but have to leave immediately. This is unlikely to happen in practice because the scheme is not suitable for businesses with high levels of exempt turnover. See paragraph 6.2 for further details.

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 are not registered for VAT
  • you use the second-hand margin scheme or the auctioneers' scheme
  • you are required to use the tour operator’s margin scheme
  • you are 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 or
    - been assessed with a penalty for conduct involving dishonesty
  • you are, or within the past 24 months have been, registered for VAT in the name of either a:
    - VAT group (see paragraph 3.7) or
    - division
  • you are, 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 Can I use the scheme if I am in a VAT group?

VAT groups are for incorporated businesses which are linked to other incorporated businesses by common control or ownership. If you are 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.

For details of eligibility to join a group see Notice 700/2 Group treatment.

If your business has been eligible to join a VAT group in the last two years, but is not eligible at the time you apply, we can let you use the scheme if we agree in writing that your former eligibility is not a risk to the revenue.

3.8 What if my business is closely linked with another business?

There is a rule which stops ‘associated’ businesses joining the flat rate scheme. Paragraph 3.9 explains some exceptions to this rule.

If you are unsure whether the particular relationship between your business and another constitutes ‘association’ then please contact our VAT Helpline.

You are associated with another business in this special sense if:

  • one business is under the dominant influence of another
  • two 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 two years, but is not associated at the time you apply, we can let you use the scheme if we agree in writing that your former association is not a risk to the revenue.

3.9 I have a close connection with another business - does this mean we are ‘associated’?

Not necessarily. Businesses are not generally ‘associated’ in this special sense where a normal commercial relationship exists.

Example 1

A business is not associated with its customer’s company just because it supplies them with the goods they request in the form they request them.

Example 2

A husband and wife are each separately VAT registered in different types of business. Even if they share premises, provided this is charged at a market rate, they will not be ‘associated’.

4. Determining your flat rate percentage

4.1 Which flat rate applies to my business?

The flat rate you use depends on the business sector that you belong in. All the sectors can be found at the link in paragraph 4.3. The correct sector is the one that most closely describes what your business will be doing in the coming year. Sections FRS7200 and FRS7300 of the Flat Rate Scheme Guidance show you which businesses we think belong in each sector.

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 is mentioned at the link in paragraph 4.3 or in the guidance mentioned in paragraph 4.1


The descriptions of the sectors are not technical and use ordinary English. So if there is a match or a close fit, use that sector.


2


Check to make sure your business is not mentioned in a composite sector


Some of the sectors refer to more than one business type.


3


If there is no sector that mentions your business, look at the sectors for ‘Businesses not mentioned elsewhere’


There is one for retail, one for business services and one for manufacturing.


4


If you still haven’t found a sector you can use ‘Any other activity not listed elsewhere’. However, if you are still unsure, or unhappy with your choice, you can phone our VAT Helpline on 0300 200 3700.


Tell the VAT Helpline that you have followed Steps 1 to 3 above.


4.2 What if I get the sector wrong?

We will not normally check your choice of sector when we process your application. So if you have made a mistake you may pay too much tax or too little. Paying too little could mean that you are faced with an unexpected VAT bill at a later date.

However, if we approve you to join the scheme, we 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 us that your choice was reasonable.

Note: 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 on our website. Flat rate scheme for VAT

4.4 Business activities that are the source of common enquiry

The table below gives the trade sector for particular business activities, which have been the subject of common enquiries to our VAT Helpline.

Business activity


Trade sector


Engineering consultants and designers


Architects, civil and structural engineers


Agents


Business services that are not listed elsewhere


Barristers


Lawyers or legal services


Florists


Retailing that is not listed elsewhere


Agronomists


Management consultancy


Television cameramen


Film, radio, television or video production


Note: if you act as a consultant and you do not fit into another specific sector, you should choose management consultancy. This sector is not restricted to businesses that fit the traditional idea of management consultant.

4.5 Reduction of 1 % for new VAT registrations

If you are in your first year of VAT registration you get a 1 % reduction in flat rate. 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. Note that 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 FRS.

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.

Example 1

A business registers for VAT on 1 December 2008 and uses the flat rate scheme from that date with a flat rate of 10 %. From 1 December 2008 to 30 November 2009 it can use 9 % if there are no changes to the business during this time.

Example 2

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.

Example 3

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.

Example 4

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.

Example 5

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 FRS until 31 March 2010. If it joins the scheme with a start date of later than 31 March 2010, it cannot apply the reduction.

4.6 What if my business fits into more than one sector?

If your business includes supplies in two or more sectors, you must apply the percentage appropriate to your main business activity as measured by turnover. 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.

Example:

If a taxi business does some car repairs, it will have to decide which of the two 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


and the car repair part of the business


the business


expects to generate turnover of £40,000 (including VAT) in the next year


expects to generate turnover (including VAT) of £15,000 in the next year


should apply the flat rate percentage for a taxi business to the total VAT inclusive turnover for both parts of the business.


4.7 What if the balance between parts of my business changes?

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.

4.8 What if I start or stop a business activity during the year?

If you stop a business activity or start a new one during the year, you will need to check if the flat rate scheme is still the better way to calculate your VAT. The change may mean you are no longer eligible to use the scheme - see paragraph 12.2. If you are 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 4.7. 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 write and tell us within 30 days of the change taking place. You should write to:

National Registration Service
HM Revenue & Customs
Imperial House
77 Victoria Street
Grimsby
Lincolnshire
DN31 1DB

4.9 What if there is a change of 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, which will be found at the link in paragraph 4.3. In these circumstances you do not have to write and tell us that you have started to use a different rate.

4.10 How do I deal with two flat rates in one VAT period?

Where a change in flat rate occurs in the middle of your VAT accounting period you will have to do two 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.

4.11 What if the change of rate coincides with changes to my 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 4.8, you should make the change as normal but use the new flat rate at the link in paragraph 4.3. If there is more than one change of flat rate in your accounting period (more likely for annual accounters), then you will need more than two VAT calculations for the period. Do each in the way outlined in paragraph 4.8.

5. Applying for the scheme

5.1 When can I 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 are registered for VAT. Try not to delay your application if you wish to use the scheme from your date of registration.

5.2 How can I apply?

By post

You can download a VAT 600 FRS Flat rate scheme application from the HMRC website.

Postal applications should be sent to our National Registration Service at the following address:

National Registration Service
HM Revenue & Customs
Imperial House
77 Victoria Street
Grimsby
Lincolnshire
DN31 1DB

If you are registering for VAT, you can enclose the form with your form VAT 1 Application for Registration.

By email

Download a VAT 600 FRS Flat rate scheme application.

Fill it in on your computer and send it to frsapplications.vrs@hmrc.gsi.gov.uk.

Please send questions or correspondence to our VAT Helpline, not this address.

By phone

Call our VAT Helpline on 0300 200 3700.

5.3 How do I fill in the application form?

The table below will help you to fill in the form. If you are in doubt phone our VAT Helpline.


Section A


Business name


Use your normal business name. If you are 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 are 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 us to process your application more quickly if we 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 VAT 1 Notification of VAT registration.


Section B


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 at the link in paragraph 4.3. Insert the full flat rate for your sector even if you are entitled to the 1 % reduction.


Section B


Start date


This will normally be from the beginning of the VAT period after we receive your application. We 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.

Section C


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.


If your accountant or other representative applies by phone for you to use the scheme, we will send you a copy of the application form completed by us for your records. If there are any errors on it please contact us immediately.

5.4 Do I need to keep a copy of my application?

Yes. This is a good idea and will help if you have to contact us about your application. Please also note the office to which you send it.

5.5 When can I start to use the scheme?

We 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, we will consider all the facts including the timing of your application and your compliance record. We 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 What if I don’t receive a reply to my application?

We will deal with your application under our Taxpayer's Charter standards. If you do not hear from us within 30 calendar days, please contact the office to which you sent the application to check that it has been received.

6. Determining your flat rate turnover

6.1 How do I work out my 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 three ways of calculating your turnover. They are:

Method


Description


Basic turnover


This is principally for those who deal mainly with other VAT registered businesses. If you are 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 are 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 are 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 must I include in my 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 Notice 700 The VAT Guide.
  • 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 and
  • the value of any despatches to other Member States of the EC if you are making intra EC supplies. For details see Notice 725 The Single Market.

Note: 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 do I exclude from my 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 Notice 701/21 Gold
  • non-business income and any supplies outside the scope of UK VAT, and
  • 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


sells goods to other 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.


sells services to other 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 Notice 741A Place of supply of services.


buys goods from other 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.


For full details about intra-Community trade see Notice 725 The Single Market.


purchases services from outside the UK to which the reverse charge applies


these supplies should be dealt with outside of the FRS. 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 Notice 700 The VAT Guide.


is partly exempt


you are 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 are 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 Notice 718 Margin schemes for second-hand goods, works of art, antiques and collectors’ items.


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 are making such disbursements, then the money received for them is not part of your flat rate turnover.


For further information about disbursements see Notice 700 The VAT Guide.


7. Keeping records and filling in your VAT return

7.1 Must I keep a VAT account?

Yes. 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 Notice 700 The VAT Guide.

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 Do I need to keep any special records?

Yes.

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.

This record must be kept with your VAT account.


7.3 Do I still need to issue VAT invoices?

Yes. 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 are using (see paragraph 6.2). You must keep copies of all sales invoices that you issue to your VAT registered customers.

7.4 How do I calculate the VAT on these 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 us.

7.5 How do I fill in my VAT return?

Filling in your VAT return is different on the scheme from the normal VAT rules because you are calculating net tax without reference to output tax and input tax. Follow the rules in the Table below where they differ from those on the VAT return form. If the value for any box is none, write none in the box. Do not leave any box blank.

Filling in your VAT return


Box 1


Use this for the VAT due under the flat rate scheme (see box 6 below). You may have other output tax to include in the box such as the sale of capital expenditure goods on which you have claimed input tax separately while using the flat rate scheme. See paragraph 15.9.


You should also use this box to record transactions that are subject to the reverse charge.


Box 2


In this box you must account for VAT on any goods you buy from other EC Member States at the standard rate of VAT and not at your flat rate.


Box 3


Will be the sum of boxes 1 + 2 in the normal way.


Box 4


Will usually be none. If you are filling in a paper VAT return write ‘none’.


If you are filling in an online return, leave as ‘£0.00’. However, there may be a claim if you:


  • make a single purchase of capital expenditure goods of more than £2,000 in value (including VAT), see paragraph 15.2
  • can recover VAT on stocks and assets on hand at registration, see paragraph 7.6, or
  • are making a claim for bad debt relief.

You should also use this box to record transactions that are subject to the reverse charge - cancelling out the figure recorded in box 1.


As with goods and services you buy from suppliers in the UK, you must not normally claim VAT on any acquisitions of goods and related services from other EC Member States. However, you can normally claim for any single purchase of capital expenditure goods of £2,000 or more value, including VAT. For more details, see paragraph 15.2.


Box 5


Will be the result of box 3 minus box 4 in the normal way.


Box 6


Enter the turnover to which you applied the flat rate scheme percentage, including VAT. You should also include the value, excluding VAT, of any supplies accounted for outside the flat rate scheme, such as the sale of capital expenditure goods.


For example: if your VAT inclusive turnover is £10,000 and your flat rate is 8 % put the £10,000 in this box and include the £800 in box 1.


Box 7


Will usually be none, except where:


  • you made a single purchase of capital expenditure goods costing more than £2,000 (including VAT) and you are claiming the input tax in box 4 or
  • you have acquired goods from other Member States of the EU.

Put the VAT exclusive value in this box.


Boxes 8 and 9


Use in the normal way.


7.6 Can I recover VAT paid before registration on goods and services?

Yes. Record the claim for eligible VAT in your VAT account for your first VAT return.

For details of the rules for claims, see 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

  • Failure to include any VAT on EC acquisitions in box 2.
  • Failure to account for VAT on EC acquisitions in box 2 at the standard rate.
  • ‘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.
  • 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.

7.8 How do I prepare business accounts for income tax purposes while I am 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 Notice 700/12 Filling in your return for further details.

7.9 How do I pay my return?

You can pay by cheque, postal order or electronic means. You may get extra time to pay and submit your return if you pay by electronic means.

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 Notice 700 The VAT Guide.

7.10 Online VAT returns

Paper VAT returns are being phased out and we will notify you in writing if you have to submit your return online and pay any VAT due electronically. Even if you are not required to submit your return online, you may do so if you wish.

If you send us your VAT return online you must also pay any VAT due by electronic means. To submit your return online you must register and enrol through our website at hmrc.gov.uk and choose to use the VAT Online Returns Service or commercially available software.

7.11 Can penalties apply to flat rate scheme users?

Yes. 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 Notice 700/50 Default surcharge.

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 Notice 700/42 Misdeclaration penalty and repeated misdeclaration penalty and Notice 700/43 Default Interest.

8. The basic turnover method

8.1 How do I use 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 Notice 700 The VAT Guide.

9. The cash based turnover method

9.1 How do I use 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.

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 What if I 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. Notice 731 Cash accounting gives information about the Cash accounting scheme.

9.4 What if I receive 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/contractor who has deducted income tax.

9.5 What if I receive payments in kind (for example, barter, part exchange)?

The following rule has the force of law.


If you are 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 Notice 700 The VAT Guide.

9.6 What if I 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 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


You may be able to balance this adjustment with a claim for relief for stocks on hand (paragraph 12.8), or a claim for bad debts (section 14).

10. The retailer’s turnover method

10.1 What is the 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 10.2 to 10.7 below.

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 do I include in 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:


  • cash
  • cheques
  • debit or credit card vouchers
  • Switch, Delta or similar electronic transactions
  • electronic cash.

10.3 What non-cash sales do I 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 May I make any deductions from my daily takings?

Yes. Your till roll or other record of sales together with the additions explained above 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 What are the rules for making adjustments to my 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 Notice 727/3 Retail schemes: How to work the Point of Sale scheme.

10.6 Are there other rules about daily takings?

Yes. If you are 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. Notice 727/3 Retail schemes: How to work the Point of Sale scheme 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 are in doubt then contact our VAT Helpline.

10.7 Special rules for florists

Special rules apply if you are a member of organisations such as Interflora, Teleflorist or Flowergram.

  • When you receive payment direct from your customer, you are the sending member and must include the amount the customer pays you in your daily gross takings.
  • When you deliver flowers ordered by customers at another florist, you are 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.
  • When orders taken by you are 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 What if my 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 are 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 What if the increase in my 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 our agreement. If you wish to remain on the scheme in those circumstances, apply in writing to:

National Registration Service
HM Revenue & Customs
Imperial House
77 Victoria Street
Grimsby
Lincolnshire
DN31 1DB

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 three conditions above are met.

11.3 What if the nature of my 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 us 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.

11.4 What if a business change makes me 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 us 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 can I leave the scheme?

If you wish to leave the scheme you must write and tell us. 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. We will confirm the date you left the scheme in writing.

12.2 When must I leave the scheme?

The table below details circumstances that can cause you to become ineligible to continue using the scheme and the date on which you must leave the scheme.

Ref


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)
  • 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 FRS 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 3.9.


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 do I have to check my 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 12.2 (b).

12.4 What must I do if I 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.

Note: if you use the cash based turnover method you must follow the rules at 9.6.

12.5 Can you withdraw the scheme from me?

Yes. We may withdraw the scheme at any time for the protection of the revenue. We will specify the date of withdrawal in our notice of withdrawal.

Additionally, if we withdraw the scheme because you were never eligible to use it, we 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 Can I rejoin the scheme?

Yes. 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 What must I do after leaving the scheme?

If you are 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. The table below gives details.

If


then


you stop using the scheme in the middle of a VAT accounting period,


you must do two 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 two 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 Notice 731 Cash accounting).


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 Notice 731 Cash accounting).


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 What do I do about stock on hand when I 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 below 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 How do I make the 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 us as a result of FRS stock adjustment.


13. Barristers

13.1 Can barristers use 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 below 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.

Example:

  • A chambers has ten barristers, two 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 two of them use the flat rate scheme the chambers must apportion the input tax. If 30 % of the input tax is apportioned to the two 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 eight barristers not using the scheme.
  • The remaining 30 % cannot be claimed as the two barristers using the flat rate scheme have already had their input tax taken into account in their flat rate percentage.

13.2 Do barristers using the scheme have to keep special records?

Chambers choosing to use the adaptation of method 3 explained above, must ensure that barristers do not claim input tax while they use 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 Can I claim bad debt relief if I use the flat rate scheme?

Bad debt relief arises if you account for and pay output tax on supplies for which you are not paid later. The rules are explained in Notice 700/18 Relief from VAT on bad debts 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 are using the cash turnover method, the rule for claiming bad debt relief are different, as explained at paragraph 14.2 below.

14.2 What if I use 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 six months since you made the supplies
  • you have not accounted for and paid tax on the supply
  • you have 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 us 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.


Note: if you apply for bad debt relief on a supply made while using the FRS you should make the adjustment as above, 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 above definition, but also specifically exclude any goods bought to:

  • resell
  • incorporate into other goods for onward supply
  • consume (or completely use) within one 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.

If the supply is:

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

then no VAT is claimable, as this input tax is already taken into account in the calculation of your flat rate percentage.

15.3 What counts as a 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 etc.) bought as one package is one purchase of capital expenditure goods. If the package costs £2,000 or more (incl. 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 one supplier at one time, then they count as one purchase of capital expenditure goods. If they are from three different suppliers or at three different times then they will be three purchases and each must be £2,000 or more (inc VAT) to qualify for a reclaim of VAT.

15.4 What counts as goods and services?

  • A van leased/hired to your business, counts as one continuous supply of services, as ownership will never transfer to your business.
  • A 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.
  • A builder builds an extension to his business premises supplying all materials himself and including their cost in his final bill. No VAT is claimable, as this construction is a supply of services, not of capital expenditure goods.

15.5 What counts as capital or non-capital goods?

  • A shopkeeper buys bricks, cement and fittings from his 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 etc. are not capital expenditure goods.
  • A 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 of these capital expenditure goods and input tax can be claimed.

15.6 What if I 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 us 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 Notice 706/2 Capital goods scheme.

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.

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).

Example:

  • 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.

Note: 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. Appeals

16.1 What if I disagree with your decision about my use of the flat rate scheme?

You can ask us to reconsider our 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:

  • we refuse to authorise your use of the scheme
  • we remove you from the scheme
  • you disagree the category and the flat rate percentage that applies to your business.

Further information about what to do if you disagree with an HMRC decision can be found at How to appeal against an HMRC decision - indirect tax.

16.2 Can I carry on using the scheme if I have appealed?

If you have appealed about our 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, we will normally allow you to continue to use the scheme pending the outcome of the appeal.

17. Form VAT 600 FRS

Form VAT 600 FRS

Your rights and obligations

Your Charter explains what you can expect from us and what we expect from you. For more information go to Your Charter.

Do you have any comments or suggestions?

If you have any comments or suggestions to make about this notice, please write to:

HM Revenue & Customs
VAT Directorate
Subject Matter Experts (SME)
VAT Process Owner Team (VPOT)
1st Floor Regian House
Liverpool
L75 1AD

Please note this address is not for general enquiries.

For your general enquiries please phone our Helpline 0300 200 3700.

Putting things right

If you are unhappy with our service, please contact the person or office you have been dealing with. They will try to put things right. If you are still unhappy, they will tell you how to complain.

If you want to know more about making a complaint go to hmrc.gov.uk and under quick links, select Complaints and appeals.

How we use your information

HMRC is a Data Controller under the Data Protection Act 1998. We hold information for the purposes specified in our notification to the Information Commissioner, including the assessment and collection of tax and duties, the payment of benefits and the prevention and detection of crime, and may use this information for any of them.

We may get information about you from others, or we may give information to them. If we do, it will only be as the law permits to:

  • check the accuracy of information
  • prevent or detect crime
  • protect public funds.

We may check information we receive about you with what is already in our records. This can include information provided by you, as well as by others, such as other government departments or agencies and overseas tax and customs authorities. We will not give information to anyone outside HMRC unless the law permits us to do so. For more information go to hmrc.gov.uk and look for Data Protection Act within the Search facility.

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$START-DATA$ title=Flat Rate Scheme for small businesses^ summary=VAT Notice 733: The flat rate scheme is designed to help small businesses by letting you calculate your VAT payment as a flat rate percentage of your turnover. The percentages are decided according to the trade sector your business is in. Under the scheme you will not be able to reclaim any of the VAT you pay, as this is taken into consideration as part of the percentage calculation.^ doctype=PublicNotice^ date=30-Apr-2014^ author=WJ6003075^ $END-DATA$
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