Accounting for Flat Rate VAT scheme in Microsoft Office Accounting
HMRC introduced an optional flat rate VAT scheme in April 2002 for all small businesses, who at the point of joining the scheme had:
a VAT exclusive annual taxable turnover of up to £100,000, and
a VAT exclusive annual turnover, including the value of exempt supplies and other non taxable income, of up to £125,000.
A business that joins the scheme avoids having to account internally for VAT on all purchases and supplies, and instead calculates its net liability by applying a flat rate percentage to the tax inclusive turnover. The flat rate percentage depends on the trade sector into which a business falls for the purposes of the scheme. There is a wide spread of applicable percentages ranging (on introduction of the scheme) from 5% to 14.5%.
Under the flat rate scheme businesses continue to charge their customers the normal rate for the supply (i.e. not the flat rate percentage) on all taxable supplies of goods or services and issue tax invoices in the normal way. But instead of reclaiming VAT on purchases at the full rate you need to claim a flat rate as a percentage on VAT inclusive sales. So how do you handle the Flat Rate Scheme in Office Accounting?
The simplest way is to record VAT as normal (15% at the moment) on your sales invoices whilst treating all purchases as zero rated. When a supplier invoice comes in for say £100 +VAT; i.e £115.00 you have to process the invoice as a purchase of £115.00 and no VAT – taking care to remember to adjust the VAT code on each line of the purchase invoice to Zero VAT. You also have to be careful how you adjust each line to get the total to add up correctly to £115.
You then produce your VAT return as normal, calculating the VAT you need to pay as the flat rate percentage times the VAT inclusive sales. The main downside tobear in mind is that this method inflates the cost of goods and services purchased – distorting the profitability reporting. It’s a trade off that a small business may be willing to take.
