Andrew Needham looks at some tips and traps when joining or leaving the flat rate scheme.
When a business joins the flat rate scheme (FRS), it need only account for the relevant flat rate percentage applicable to its trade category on its sales; however, it cannot normally recover VAT on its purchases.
The rules for the FRS can be complicated, so businesses need to be aware of them when joining and leaving the scheme to make sure they maximise the benefits and don’t fall into any traps!
Joining the FRS
If a business registers for VAT and immediately joins the FRS, the normal pre-registration input tax rules apply. So, even though you cannot normally claim back input tax when you are on the FRS, newly-registered businesses can reclaim the VAT on all stock and goods on hand at the time of registration that were bought within the last four years and on services purchased in the six months prior to registration.
If a pre-registration purchase costs more than £2,000, it qualifies as a capital purchase and VAT has to be accounted for at the full 20% if it is sold.
A business that is already VAT registered has, of course, already reclaimed VAT incurred on the stock and assets held. If there is a substantial stock of goods for resale, there may be a marginal gain under the scheme. The FRS percentage is reduced to take account of input tax which will not be recoverable on future purchases, but which has already been recovered on the stock. However, a small business would not usually have enough stock for this to be a significant advantage unless the FRS percentage happens to be favourable too.
Leaving the FRS
If a business’s turnover exceeds £230,000, it must leave the FRS. However, it only has to check its turnover annually on the anniversary of joining the FRS. If it exceeds the threshold, it then has to leave the scheme at the end of the VAT quarter containing the anniversary. If it is on annual returns, it has to leave the FRS at the end of the month following the anniversary.
Example: Leaving the FRS
If a business is on annual accounting and it joined the FRS on 23 March 2015, it checks its annual turnover every 23 March.
In 2019, the check shows it is over the limit, so it must leave the FRS on 1 May 2019.
A business has to leave the FRS if it purchases an asset covered by the capital goods scheme – most commonly a commercial property costing over £250,000 - or if it joins a VAT group or uses a second-hand scheme.
If a business’s turnover is growing fast and it has reason to believe that its turnover will exceed £230,000 in the next 30 days, it will need to leave the FRS from the start of the 30-day period.
A business may be able to make a stock adjustment and claim input tax when it leaves the FRS if its stock of standard-rated items increases. To do this, it will need to value its stock. It does not need to do a formal stock-take for the purpose of valuing its stock, but its figures must be reasonable. It makes sense to keep a record of how it valued the stock in case HMRC query the figures. For details of the calculation, see VAT Notice 733, at para 12.9.
Practical tip:
If a business joins the FRS, it can claim back the VAT on its stock on hand when it registers for VAT. A business may also be able to reclaim more VAT on stock adjustments when it leaves the FRS.
