For any business or consultancy, no matter what your legal status is, joining the VAT ‘club’ is compulsory once the business turnover in a rolling 12 month period (not the same as an accounts year) breaches the registration limit of£73,000 (all figures quoted correct as at September 2011). The Flat Rate Scheme for VAT was introduced in 2002 as a simplification measure by HMRC. It is an alternative to ‘standard calculation’ VAT assessment, which requires you to take account of all VAT collected and paid out.It is available to businesses with an annual turnover of up to £150,000 and requires an opt in by specific registration.Once in the scheme you can stay in it if your turnover increases up to £230,000.
It works like this. As a business you carry on charging your clients in the normal VAT registered way, adding and collecting 20% VAT to every invoice sent out. The deal is that instead of paying over all the VAT collected at 20% on your sales, a lower flat rate percentage is simply applied to your total sales, without consideration of your costs / VAT you have paid on purchases.
There are different flat rate percentages for different business sectors which must be applied, arrived at by HMRC based on the typical costs incurred within an industry. Market research slots into the catch all category of ‘business services that are not listed elsewhere’, carrying a flat rate percentage of 12%.Overall the scheme is designed to be cost neutral in tax terms but as the HMRC website points out, there will be winners and losers and a careful assessment is needed. There is of course only any point in considering the flat rate scheme if there is likely to be a financial advantage to you. In addition, you will find flat rate VAT calculations easier – but this is a secondary potential benefit.
If your business carries a modest proportion of direct or indirect costs that include VAT, the chances are that you will gain under the flat rate scheme.But if you carry substantial costs such as fieldwork or viewing facilities where VAT is charged by the supplier, the outcome could be very different. Your calculation of your typical cost proportion, or the overall margin on your turnover, is all important in deciding whether you will be a flat rate winner or loser.
As a rule of thumb, the VAT flat rate scheme is definitely worth investigating if your research business is more consultancy based and carries limited costs. If you incur significant costs that carry VAT you may well lose out, so tread carefully.Every business must be looked at individually. More details and useful worked examples can be found on the HMRC website at https://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm
Some factors to consider:
- Zero rated supplies such as research for non EU clients must be included in your flat rate scheme turnover, and so a particularly careful review is needed if your turnover includes any international sales.
- In your first year of VAT registration you can benefit from a 1% discount, bringing the flat rate percentage down to 11%
- You can leave the scheme should circumstances change (but you cannot then rejoin within 12 months)
- You can still claim back VAT on equipment purchases of over £2,000 (VAT inclusive, from one supplier at the same time)
- The scheme catches other forms of income such as bank interest, rent receivable (including from ‘buy to let’) and asset sales, for example a business car – these can have adverse consequences and must be carefully considered.
You can also seek advice from your accountant if you think that the Flat Rate Scheme for VAT might work to the advantage of your business and its particular circumstances.
Nick Dillow
Chartered Accountant