Friday 10th April 2009 Blog

Traps in the VAT Flat Rate Scheme

 
The Taxman likes to encourage small businesses to join the flat rate VAT scheme. This scheme simplifies your clients VAT return as they apply the relevant flat percentage applicable for their trade sector to all their total business income each quarter, (including the VAT charged), and pay the resulting amount as VAT to the Taxman as VAT. Your clients don't have to worry about reclaiming VAT charged on purchases.

However, the flat rate VAT scheme does not suit all small businesses. The flat rate must be applied to all business income, including interest received from business bank accounts, rents, and sales of assets where VAT was not reclaimed, such as cars or property. This means your client effectively pays VAT on the gross receipts of sales on which they have not collected any VAT.

If your client is a sole-trader the flat rate should be applied to any letting income they receive in their sole name, as lettings are regarded as a business for VAT purposes. Lettings undertaken as a partnership, perhaps jointly with their spouse, are not counted as part of their sole-trader business income. When you sell a let property the flat rate should be applied to the total proceeds. Your client can withdraw from the flat rate scheme before they sell a high value item such as a property, but they have to stay out of the scheme for at least 12 months.

Remember the flat rates for most business sectors changed on 1 December 2008, when the standard rate of VAT was reduced to 15%, so check your clients are using the correct flat rate for their sector.
 

Posted by: Bookcert Mentoring Team

Friday 10th April 2009

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