Discover what VAT Accounting Software Small Businesses Should Know About

Discover What VAT Accounting Software Small Businesses Should Know About

The HMRC introduced the flat rate scheme to minimise red tape for small business owners in relation to their VAT records. Businesses are eligible if they supply vatable goods and services and their turnover for the annum is expected to be £150k or less, net of vat. Businesses can stay in the scheme until total income is £230k, inclusive of vat.

The HMRC introduced the flat rate scheme to minimise red tape for small business owners in relation to their VAT records.

Businesses are eligible if they supply Vatable goods and services and their turnover for the annum is expected to be £150k or less, net of vat. Businesses can stay in the scheme until total income is £230k, inclusive of vat. (please note there are other criteria for eligibility, for example if the business was in the scheme and left the scheme during the previous 12 months).

The HMRC sets a flat rate for each industry sector. For example, on 4th January 2011; for restaurants and takeaways is 12.5 percent and for computer repair services is 10.5 percent.

A business that works in multiple industries can only apply one flat rate percentage. The business must apply the rate from the part of the business that generates the most turnover.

Businesses within the scheme can pay their vat on accrual basis or cash basis. Accrual basis is when VAT payment is due after invoicing or supplying the customer. Cash basis is when VAT Payment is due after receiving monies from the customer (note: If HMRC changes the flat rate for a business sector before receipt of payments from customer; the flat rate at date of supply, invoice applies rather than at date of receipt from the customer).

Advantages of Flat rate schemes.
Though business owners have to charge VAT and show VAT on invoices, there are fewer rules than accrual vat scheme and business owners can spend less time on keeping their vat records. For example, business owners do not need to separate vat element from gross value of their purchases; when recording purchases on their books or accounting software.

VAT is calculated as a percentage of turnover. Some businesses pay HMRC less vat than collected because their flat rate percentage is less than standard rate.
Some business pay more than VAT collected. For example, it will be more advantageous for a business to be in another vat scheme if it supplies zero rated or exempt supplies but purchases allot of goods and services at standard VAT rate.

Before deciding to enter the flat rate scheme, we would advise the business owner to discuss with an accountant, who is qualified and indemnified to advise them on the pros and cons for their particular business to enter into the scheme.