Commentary

V2.199B Flat rate scheme for small businesses—eligibility and application

Part V2 Registration – deregistration

V2.199B Flat rate scheme for small businesses—eligibility and application

V2.199B Flat rate scheme for small businesses—eligibility and application

Overview of the flat-rate scheme for small businesses

UK flat rate scheme

The flat rate scheme (referred to here as 'the scheme') was introduced from 24 April 20021. The main benefits of the scheme are intended to be2

  1.  

    •     simplified record keeping, as the taxpayer does not have to keep detailed records of sales and invoices

  2.  

    •     fixed-rate percentages that are lower than the standard rate

  3.  

    •     simpler cash flow management

Broadly, it allows HMRC, by regulations3, to make provision for authorised businesses to calculate their VAT liability by applying a fixed percentage to their turnover for the relevant period, rather than totalling the amounts of output tax charged on individual supplies, and the input tax paid on individual purchases, in that period4. However, such a business is not relieved of the obligation to issue tax invoices for sales to other taxable persons.

A person who is, for the time being, authorised under the scheme is known as a 'flat-rate trader'5.

Example

Arthur makes taxable supplies in a VAT quarter of £30,000 (including VAT). He is fully taxable, and incurs taxable expenses of £11,250 (including VAT).

Under the normal VAT accounting rules, and assuming a rate of VAT of 20%, Arthur would account for output tax of £5,000, and recover input tax of £1875, giving a net liability of £3,125.

Under the scheme, he would apply the relevant flat rate to his turnover of £30,000. Thus a flat rate of 9% would be advantageous, giving a liability of

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