Pleasantly surprising benefit of using the VAT Flat Rate Scheme

Friday February 2017

Under normal accounting rules there are two methods of dealing with VAT incurred on the purchase of goods which will be put to both business and private use. The primary method of dealing with the input tax is to apportion it at the time of purchase. The second method involves claiming all of the input tax at the time of purchase.  Thereafter, on a periodic basis, an adjustment must be made and output tax accounted for on the private use that has arisen in that period.

However, to help to simplify the flat rate scheme, where VAT on capital expenditure goods is reclaimable, the intended use of those items is treated as wholly for taxable purposes. This means that you do not need to apportion input tax to cover any planned private (or exempt) use of the goods!

The flat rate scheme has certainly simplified the completion of VAT returns for small businesses and for many businesses there are significant gains to be made by using the scheme.  Although, these may be significantly reduced from April this year following the introduction of the anti-avoidance rule for low cost traders. (See here for further details: https://www.gov.uk/government/publications/tackling-aggressive-abuse-of-the-vat-flat-rate-scheme-technical-note/tackling-aggressive-abuse-of-the-vat-flat-rate-scheme-technical-note

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