VAT Flat Rate Scheme

14th May 2016 | 3D ARM

The pros and cons of the flat rate VAT scheme

Recently my accountant suggested I should move to the flat rate scheme as it may represent a lower rate than the typical 20%.

With the flat rate scheme you have to search through the list trades your company falls into:

https://www.gov.uk/hmrc-internal-manuals/vat-flat-rate-scheme/frs7200

Searching through I couldn’t find one that represented Game Development, the closest I found were things like ‘Computer and IT Consultancy’.

I rang the VAT office in the end where the lady advised me to go on the ‘Unspecified’ rate which pertains to there being no listing suitable for ‘Game Development’.

This rate is 12% and 11% for the first year, there are pros and cons of course and I have listed some below:

Points to consider:

1.If you estimate that your annual turnover excluding VAT will exceed £150,000 in your first year, you shouldn't join the scheme.

2.If your annual turnover exceeds £230,000 of VAT inclusive revenue in subsequent years you must come off the scheme.

3.Companies on the flat rate scheme are unable to claim back any VAT on purchased goods and expenses for their business. You can however reclaim VAT on capital asset purchases over £2,000, for example a PC. Providing all the capital purchases are on the same receipt such as a PC, printer and scanner you can claim the VAT back on these items. You cannot however buy a PC one month for £1,500 then a printer the next month for £300 and a scanner the month after for £200 and add them together, they must all be on the same receipt

Advantages

1.The ability to earn money from VAT, you can earn thousands of pounds extra each year simply out of VAT (the government does this as the FRS is simple for them to manage and you are in affect acting as a tax collector).

2.A reduced amount of paperwork to handle as you are not submitting any of your input costs to HMRC all you need to do is keep the receipts from your purchases.

3.If you are a new business, using the flat rate scheme in your first year, you receive a further 1% decrease on the overall percentage tax you pay each quarter.

4.Fewer rules to follow. You no longer have to work out what VAT on purchases you can and can't reclaim.

5.Peace of mind. With less chance of mistakes, you have fewer worries about getting your VAT right.

6.Certainty. You always know what percentage of your takings you will have to pay to HMRC.

Disadvantages

If you are buying lots of stock or have high VAT chargeable expenses, you will miss out on reclaiming the VAT.

The flat-rate percentages are calculated in a way that takes into account zero-rated and exempt sales. They also contain an allowance for the VAT you spend on your purchases. So the VAT flat rate scheme might not be right for your business if:

You buy mostly standard-rated items, as you cannot generally reclaim any VAT on your purchases.
You regularly receive a VAT repayment under standard VAT accounting.
You make a lot of zero-rated (e.g. goods sold to non-UK business located within the EU) or exempt sales (e.g. rent received on residential property). (Most) services provided to business outside of the UK are wouldn't charge FRS VAT.

I hope this may be of some use to developers, thank you to my accountant Sarah Tandy at Thomas and Young http://www.thomasandyoung.co.uk/