Flat Rate VAT trap

[x332race]

Has anyone else been caught by the Flat Rate VAT trap....I am registered for VAT and it was suggested that I to go on the Flat Rate Scheme. In principel this seemed ok when I looked into it....I charge my clients VAT at 17.5% and pay Inland Revenue VAT at 12.5%

I have been doing this quite happlily for the past couple of years. Now I find that I should have been paying the IR 12.5% of my invoices + VAT (what they term "gross income" on their site. Thus if I were to charge my client £100 + VAT (£117.50), the IR reckon I should be paying them 12.5% or the £117.50 ie £14.69. I have been paying £100 x 12.5% ie £12.5. Thus being on the fixed rate VAT scheme is really only worth 2.8%.

Over the years, it seems I now owe a substantial amount of money in VAT. I am peeved as the way the IR present the Fixed Rate Scheme makes it appear relativly generous and worthwhile while, in practice, it seems it is worth less that it appeared initially. I have always been careful to make VAT payments when due and am annoyed to find out that I have to pay more to the IR to waste. I gather that many others have been caught out by this and owe back payments.

 

[jonnyboy]

out of interest, what type of business are you in? i thought the flat rate only applied to farmers and nurserymen?

i have to say, from what you've posted so far, it seems like even though you owe some back VAT, the scheme appears to put you into profit on the VAT? or is it only recovereable @12.5% too?

am asking as we are about to go Vat'd, and as a service business we have little opportunity for VAT recovery on purchases, its a worry, could lose clients through it....

 

[timskemp]

Flat rate VAT is available to many now, but for me they wanted 14% so I didn't bother, it was made clear as well that it's 14% of the net invoice.

I only ever have one thing to say about VAT - Always be under the protection of a limited company and always get someone else to double check you're doing it right - Customs people have no sense of humour, little patience and ridiculous powers.

 

[wemorgan]

I'm also VAT flat rate registered. Sorry to hear you misunderstood the method. A financial kick in the teeth I'm sure. The method you give is the one I understood it to be ie. not as good as it first appears. Though if you're mostly a service provider, it is still financial beneficial to be flat rate registered.

Did you pay an accountant to set up your business, or do you still use one now? It's a tough lesson to learn sadly.

ps. I'm sure you are full aware that as of 1st Dec VAT is now 15% and your flat rate would have also changed. Some rates are better, some worse.

 

[wemorgan]

i have to say, from what you've posted so far, it seems like even though you owe some back VAT, the scheme appears to put you into profit on the VAT? or is it only recovereable @12.5% too?

Yes, VAT is effectively easy money to service providers. A rare gift from HMRC for doing less paper work.

If you are flat rate registered you can not claim back VAT on single expenses <£2000. So it's aimed at service providers with relatively modest turnover.....as far as I am aware.

 

[wemorgan]

Customs people have no sense of humour, little patience and ridiculous powers.

I've said before that however draconian traffic police, speed cameras et al may seem to be, this is not compared to HMRC.

 

[tromppost]

its a right buggers muddle to figure out even with the instructions. have a look at http://customs.hmrc.gov.uk/channels...ntent&id=HMCE_CL_000345&propertyType=document (7.5 How do I fill in my VAT return?)its very handy when putting in your return.

 

[x332race]

I am a surveyor...the flat rate scheme covers many different services/professions.

I did use an accountant to set up the company....he suggested that I go on the flat rate scheme as it would be simpler for me and I would have a small surplus each year. I actually set up the VAT side of the business and calculated my payments trying to follow the syatem on the IR site.....The problem is that their definition of Turnover is different from mine (and most other businessmen). I define turnover as the money I charge my clients less VAT, they define turnover as inculding VAT.....this defies logic and is not clear until you read the wording very carefully.

It is still probably benificial for me to be registered on the flat rate scheme, but not so benificial as I thought, especially with the recent changes in VAT. I would need to look again as to whether it would be more benificial for me to be on the "normal" way of dealing with VAT

 

[davidjpowell]

I'm also a surveyor on flat rate. Works well for me, although I almost got caught out in the same way.

The classifications were interesting I thought. As a lot of my work is Management based, I ended up with quite a good rate. Just wished I had seen the scheme earlier.

 

[tromppost]

dont forget you have to pay tax on the "profit"

 

[wemorgan]

I'd recommend anyone who is self employed to talk to an accountant. As the profit can be managed by legitimate use of expenses, allowances and pension contributions. There's no need to give the tax man more than his fair share

 

[x332race]

I'd recommend anyone who is self employed to talk to an accountant. As the profit can be managed by legitimate use of expenses, allowances and pension contributions. There's no need to give the tax man more than his fair share

Agreed.

 

[Meldrew2]

I am also on flat rate.

With the recent rate change to 15%, the amount of VAT I charge has dropped by 2.5%.

The amount I have to pay HMRC has only dropped by 1.0%

B****y G****n B***n

B****y N*w L****r

Or - as Jeremy Clarkson put it....

B****y O** E*** S******* I****

Idiot? Maybe.
Rip Off Merchant? Definitely.

 

[Benzowner]

I'd recommend anyone who is self employed to talk to an accountant. As the profit can be managed by legitimate use of expenses, allowances and pension contributions. There's no need to give the tax man more than his fair share

I agree, tax avoidance NOT tax evasion, I am not so sure about the pensions contribution bit though, spending £1 to not pay the tax man 20p, does not seem logic. I know you will get your pension eventually, but you will pay tax on that as well, anyway tthis is going off topic.

I have not heard of flat rate VAT, only cash accounting as the alternative. This is where the VAT is paid and collected in the quarter when invoices are paid, or monies received, i.e not on invoice date.

 

[wemorgan]

I originally thought that the lower VAT might help cash flow for businesses, but now I feel it has been the such a waste of money.

 

[tromppost]

I agree, tax avoidance NOT tax evasion, I am not so sure about the pensions contribution bit though, spending £1 to not pay the tax man 20p, does not seem logic. I know you will get your pension eventually, but you will pay tax on that as well, anyway tthis is going off topic.

I have not heard of flat rate VAT, only cash accounting as the alternative. This is where the VAT is paid and collected in the quarter when invoices are paid, or monies received, i.e not on invoice date.

use the link on post 7, it explains all.

 

[x332race]

I am also on flat rate.

With the recent rate change to 15%, the amount of VAT I charge has dropped by 2.5%.

The amount I have to pay HMRC has only dropped by 1.0%

B****y G****n B***n

B****y N*w L****r

Or - as Jeremy Clarkson put it....

B****y O** E*** S******* I****

Idiot? Maybe.
Rip Off Merchant? Definitely.

Actually, when you work it out, it comes to virtually the same as when vat was 17.5%.....as I have recently found out, the amount paid the HMRC is based on "gross turnover" by whish HMRC means what your charge clients and the VAT. Thus if your charge your cleint £100 gross turnover is £115. The HRMC percentage must be calculated on the £115 figure. Its unecessarily complicated and confusing.

 

[oldcro]

As a consumer I am amazed that companies can keep a percentage of the VAT I pay for goods or services. From the posts here my understanding is that basically you get paid for paying the VAT you owe. Profit from the goods or services then more profit from the VAT charged? No wonder things are so expensive here.
Hope I have read the articles wrongly and totally misunderstood them.

 

[davidjpowell]

Companies can usually set off against vat they charge, vat that they pay for almost anything business related (it gets complicated with Petrol and the like).

Flat Rate has limits so that only fairly small business can use it, and differeing % that you pay of turnover (including VAT). I for instance pay 9% now (I think - I must check), and it is meant to make life simple, rather than going through the procedure of itemising VAT on each and every receipt.

One useful note of the VAT reduction is that the the government dropped vat by 2.5%, put fuel tax up which businesses cannot reclaim.

And even though I don't I should get paid for collecting VAT for the government.

 

[x332race]

As a consumer I am amazed that companies can keep a percentage of the VAT I pay for goods or services. From the posts here my understanding is that basically you get paid for paying the VAT you owe. Profit from the goods or services then more profit from the VAT charged? No wonder things are so expensive here.
Hope I have read the articles wrongly and totally misunderstood them.

The flat rate scheme is designed to cut down paperwork for the small business....basically it is meant to save paperwork as it takes away the need for a business to log all vat paid on expenditure. It is not really designed to "make a profit" for a business, it just happens that way sometimes.