Flat Rate VAT Scheme

[2plank]

Hi Guys, First thread on this site so please bear with me.

I have just been advised that I must apply for VAT registration, due to turn over exceeding the threshold by approx £6000. This is something I had wished to avoid as 95% of my customers are private individuals.
I have read about the flat rate system, that indicates that my line of business would need to pay 9% of the taxable turnover under this scheme, but it goes on to say that I will need to charge VAT at the current rate of 17.5% on invoices.
This is where I am a little lost. This implies that at the end of the year or quarterly period, I would owe HMRC 9% of the 17.5% I have charged my customers, therefore resulting in 8.5% increase in profit. I could simply cut my prices by 8.5% resulting in the same profit margin as current?
Surely I must have got this wrong, can anyone please help some one as thick as 2 planks to understand this scheme?
Thanks in advance for any help.

Regards

2plank

 

[Pab]

Here's an example of how I understand it.

Let's say you sell something for £100 + vat. That's £100 + 17.5% = £117.50

You pay HMRC 9% of the total amount. So, £117.50 / 100 * 9 = £10.58 tax liability.

You're left with £106.92, so you've effectively 'made' £6.92 on the VAT you've charged.

However, you're not able to claim back VAT on purchases (I think). So if you buy lots of things, it might not be worth your while.

I'm sure an accountant will be able to explain things better.

 

[elaine@cheapaccounting]

If you sell something for £100 now you will charge £100 plus vat at 17.5% = £117.50

Vat collected £17.50

If you register for FRS at 9% then you pay over to HMRC

£117.50 x 9% = £10.57

The difference accounts for vat you may have been able to claim on your purchases.

Two things to bear in mind:

- one of the first year discount of 1% - do the 9% becomes 8% for one year only

- corporation tax is due on the difference of £17.50 - 10.57

 

[2plank]

That is exactly how I understand it.

It appears that you can actually make money with this system, without all the usual headaches of the VAT paperwork etc?

 

[elaine@cheapaccounting]

That is exactly how I understand it.

It appears that you can actually make money with this system, without all the usual headaches of the VAT paperwork etc?

well maybe - depends how much vat you could have claimed back on your costs.

the scheme is designed to reduce admin and paper work

 

[David Griffiths]

That is exactly how I understand it.

It appears that you can actually make money with this system, without all the usual headaches of the VAT paperwork etc?

Don't forget that you have to charge the flat rate on all of your business income, so if you have any zero rate or 5% rate sales, you lose out on them. It also applies to income that is normally exempt from VAT such as bank interest.

HMRC set the rate by examining typical returns from small businesses in the various sectors. The aim is to make life simpler, not to hand somebody a profit.

There will be winners and losers on transferring to the scheme - most of the losers of course won't bother with it.

We had two more or less identical business a couple of years back (part of the same family, in fact) One was better off on the flat rate scheme, the other wasn't. The reason for that was the second business paid VAT on the rent - that made all of the difference

 

[2plank]

I am a one man band who works from home with a van. All of my products purchased are charged at the standard rate 17.5% It would suggest that maybe I could be a winner with this scheme? Not sure about the corporation tax on the VAT difference, how does this work?

 

[elaine@cheapaccounting]

I am a one man band who works from home with a van. All of my products purchased are charged at the standard rate 17.5% It would suggest that maybe I could be a winner with this scheme? Not sure about the corporation tax on the VAT difference, how does this work?

Sorry - assumed you were a limited company.

If a sole trader you will pay income tax on the difference

 

[2plank]

Thanks for all your replies. I have survived todate with out being able to claim any VAT on purchases. Most purchases are on demand basis, some more basics held as stock, therefore it would seem that I will be no worse off not being able to claim back any VAT. I appreciate that this system is designed to simplify VAT for small businesses, but I still cannot get my head around the fact that I can charge 17.5% to customers, and only pay HMRC 9% (8%) in the first year (thanks Elaine)? Hope Mr Darling is not reading this!!!!!

 

[Zeno]

Remember that the Flat Rate Scheme was brought it at the whim of HMRC and could be withdrawn at any time.

I personally believe that this will happen sooner rather than later as I would imagine that HMRC did not predict how it would be used - basically, it is in theory supposed to make book keeping easier however my experience is that:-

1. It does not really. Depending on your system it may even make it more complicated.

2. I have never read anything to support this, but I would imagine that the error rate when compared to normal accounting must be huge. Many people confuse the gross turnover (the threads on accounting web that discuss what exactly should be included in here indicate that the professionals are just as confused) for instance and the actual choosing a trade sector is somewhat dubious. Few of my clients seem to fit into them...

3. I do not know anyone who uses this method unless the financially benefit from it. Do you suppose HMRC took this into account?

 

[2plank]

Thanks Zeno, you may well be right! For someone like me who to be honest, doesn't know the difference between all the different tax schemes, the way I read it is that what ever the total income that the business makes will now attract a further 17.5% I will then have to pay HMRC 8%, increasing to 9% in the second year of this total? Maybe I still am not grasping it, but to me it seems like a 9.5/8.5% increase in income, with just a fixed payment made to HMRC? Obviously this will attract income tax, but still it seems a lot more simple than usual VAT paperwork?
Even I should be able to calculate what is needed to be paid to HMRC, this is what is baffling me, it seems to simple?

 

[Zeno]

Basically, I am not saying that you should not use the scheme but that you should not rely on it for the profitability of your business. Make hay while the sun shines and all that so look on it as a bonus.

Do you have an accountant to discuss it with? Plenty on here could help you.

 

[2plank]

Sorry if I have misled you. I am not intending to use the scheme as a way of increasing profit, I just wanted to ensure that I had understood the system properly. For me, VAT and HMRC send shivers down my spine. These people I believe are the most powerful when it comes to business dealings. Am I right in thinking that customs and excise (VAT) is the first thing on the list to be paid?
It just struck me as a bit odd that what most people seem to say about how difficult VAT returns, making sure everything is 101% correct etc, seems to have a relatively simple solution for some one like me.

 

[perplex]

Sorry to hijack but I have a query with VAT. If a business can reclaim all VAT paid on stock purchases for retail sale AND charge VAT on the sale, then how does HMRC get their VAT from the transactions as surely the business has charged VAT from the customer but at the same time is also able to reclaim the VAT on business purchases (stock etc).

 

[Williams lester]

Sorry to hijack but I have a query with VAT. If a business can reclaim all VAT paid on stock purchases for retail sale AND charge VAT on the sale, then how does HMRC get their VAT from the transactions as surely the business has charged VAT from the customer but at the same time is also able to reclaim the VAT on business purchases (stock etc).

HMRC will get the difference in the VAT between the selling price and the buying price, which is ......the Value Added!!

 

[perplex]

HMRC will get the difference in the VAT between the selling price and the buying price, which is ......the Value Added!!

Thanks, I did know that but just getting a bit confused with all the input tax, output tax terms.