flat rate vat and claiming expenses

[Deleted User]

I'm currently looking at registering for vat on the flat rate scheme (my rate would be 11.5%).

There looks like there is a definite advantage to me as, for example:

bill 1000 plus vat = 1175 = money received

pay to vat man = 0.115 * 1000 = 115

extra profit = 1175 - 115 - 1000 = 60 (ie the 6% of 1000)

The loss is in the fact that I would then lose out on the vat I've paid on expenses. eg if I incur expenses of 235 in earning the 1000, I could only claim 235/1.175 = 200 against tax so a loss of 40% of 35 = 14
ie a net gain of 60 - 14 = 46

Is this logic correct? On my self assessment expenses, would I only put the net amount of expenses excl the vat (ie 200 not 235 in the example above)?

Many thanks - appreciate any help given.

Elaine_Wilson

If you're trying to work out whether the flat rate scheme would benefit you be careful not to mix up VAT and income tax in your calculations.


First, note that the amount you pay under the flat rate scheme in your example is £135, not £115. The percentage used has to be applied to the gross turnover including VAT, so 11.5% of £1175.

Under the normal scheme you would have paid over £175 - £35 = £140.

The flat rate scheme gives you a liability of £135.13, so if the level of expenses quoted is typical you will benefit from being registered.

The income tax position is a little more complicated. You can work it out in either of two ways (whichever is easier considering your bookkeeping system).

You can continue to record both income and expenditure excluding VAT (as you do now) and enter these figures on the SA form. You would then also enter the difference between the amount of VAT you would have paid over under the old scheme and the amount actually paid over. This could, of course, be either a profit or a loss depending on your actual pattern of expenditure.

Alternatively you can enter the figures on the SA form gross of VAT. You can then claim a deduction for the VAT actually paid over. The two methods should end up with the same profit.

Not sure if this is clear but try it out with some simple figures.

Regards

freesave

If you are going to be regisreing for the first time you get an additional 1% for the first year. The rate you quote may already take this into account. Additonally the following may be of interest to you in arriving at your decision:

Capital assets

If capital assets are purchased with a VAT inclusive value of £2,000 or more, the VAT can be recovered in the normal way. This concession, however, cannot be used where the assets were

acquired for resale, or for incorporation in goods to be sold
acquired to be hired out, leased or let
for consumption within one year, or
covered by the capital goods scheme.

[Deleted User]

Elaine_Wilson wrote:

The income tax position is a little more complicated. You can work it out in either of two ways (whichever is easier considering your bookkeeping system).

You can continue to record both income and expenditure excluding VAT (as you do now) and enter these figures on the SA form. You would then also enter the difference between the amount of VAT you would have paid over under the old scheme and the amount actually paid over. This could, of course, be either a profit or a loss depending on your actual pattern of expenditure.

Alternatively you can enter the figures on the SA form gross of VAT. You can then claim a deduction for the VAT actually paid over. The two methods should end up with the same profit.

Not sure if this is clear but try it out with some simple figures.

Regards

Many thanks for your reply. The flat rate scheme isn't quite as good as I thought as I'd missed the fact that it applies to the 1175 ie effective vat rate paid over is 11.5*1.175 = 13.5%.

On income tax, I'm still a little confused. I'm not currently vat registered so using the above figures my tax bill could be say 40% * (1000 - 235) = 306

After registering for vat under the flat rate scheme (and ignoring the extra 1% in year 1 for now) would my bill be 40% * (1175 - 235 - 135.13) = 322

If so, I appear to be 40 better off by registering (1175-135-1000) but 16 worse off on income tax making a total gain of 24? I realise the gain is higher if basic rate income tax is used.

I should be able to avoid the need to register using exception as turnover is unusually high at the mo so I am thinking it's probably not worth all the bother to register voluntarily.

Thanks again for your help.

thelawnet

anactuary wrote:

Many thanks for your reply. The flat rate scheme isn't quite as good as I thought as I'd missed the fact that it applies to the 1175 ie effective vat rate paid over is 11.5*1.175 = 13.5%.

On income tax, I'm still a little confused. I'm not currently vat registered so using the above figures my tax bill could be say 40% * (1000 - 235) = 306

After registering for vat under the flat rate scheme (and ignoring the extra 1% in year 1 for now) would my bill be 40% * (1175 - 235 - 135.13) = 322

If so, I appear to be 40 better off by registering (1175-135-1000) but 16 worse off on income tax making a total gain of 24? I realise the gain is higher if basic rate income tax is used.

I should be able to avoid the need to register using exception as turnover is unusually high at the mo so I am thinking it's probably not worth all the bother to register voluntarily.

Thanks again for your help.

Your income should be calculated as:

Revenue inclusive of VAT - Flat rate VAT paid
- Expenditure inclusive of VAT

http://www.hmrc.gov.uk/manuals/bimmanual/BIM31585.htm

So if you make sales of £50,000 in a year, excluding VAT, which is £58,750 including VAT, then the flat rate VAT is £6756.25.

So your revenue is
£58750 - £6756.25 £51,243.75
expenditure is £5000 (the VAT status is not relevant for flat rate)

profit is £46,243.75

Without vat, the profit would be:

£50,000
- £5000
= £45,000

So you made £1,243.75 extra, in return for submitting four quarterly VAT returns.

If you were VAT registered without using the flat rate scheme, your revenue is
£50,000 + £8,750 VAT
assuming expenditure of £5,000 inclusive of VAT at 17.5%, then input VAT is £744.68
So profit is £50,000 + £8,750 - £5000 - £8750 + £744.68 =

£45,744.68

In this case you gain because you can reclaim your input VAT

You will pay income tax on more income, but I don't thinkt hat's somethign to worry about :-)

The only reason not to register is if having to pay VAT would cost your customers more (i.e. they are not themselves registered or are on flat rate scheme themselves), or if you don't want the admin.

Whether flat rate is better or not depends on your VATable expenses.

The equation is
1.175r * 0.115 < .175r - .175x/1.175
where r is predicted revenue exclusive of vat, and x is VATable expenditure, including VAT

i.e. 0.039875r > 0.148936x
so r > 3.74x

So if your revenues are currently more than 3.74 times higher than your VATable inputs, i.e. expenses are less than 26.8% of revenues, the flat rate scheme would suit you better.

[Deleted User]

Great help, many thanks for your time.