MICHAEL Proudfoot, a director at the Kendal office of Lonsdale & Partners Chartered Accountants, answers the following question posed by many business clients in his latest article for Business Gazette.

Q: I have been told that there is a new, simplified VAT scheme that might be suitable for my business. How does it work?

A: You are probably thinking of the Flat Rate Scheme, which came into existence on April 25, 2002. It was designed to reduce the cost of complying with VAT obligations by simplifying the way small businesses calculate their VAT.

The scheme saves time by removing the need to calculate and record output tax and input tax to calculate net VAT due to Customs & Excise.

The VAT in a period is calculated by applying the flat rate percentage to the tax-inclusive turnover for the period.

It is available to businesses which expect their turnover in the next 12 months to be no more than £150,000 taxable supplies (increased from £100,000 in April 2003).

Customs & Excise have published a table showing rates applicable to many business sectors.

These range from five per cent (for retail food, newspapers, confectionery) to 14.5 per cent (computer and IT consultancy).

The particular flat rate to be used depends on which trade sector most accurately reflects any particular business.

If a business includes supplies in two or more sectors, the percentage to be used is that appropriate to the main business activity as measured by expected turnover in the year ahead.

If you are making supplies to other VAT registered businesses, you give them a VAT invoice charging VAT at the normal rate for the supply (not the flat rate percentage).

Most traders with qualifying turnover are eligible to join the scheme, but there are a number of exclusions designed to prevent abuse of the scheme as well as a few to avoid complex interaction with other schemes.

The scheme is optional, but traders wishing to join should complete form VAT600 (FRS), which can be printed off the Customs & Excise website at http://www.hmce.gov.uk.

While it does simplify matters, the accounting businesses can lose out if they are planning any expenditure on plant which would have generated a VAT refund.

It is necessary, therefore, to review the amounts involved before proceeding.

May 29, 2003 16:00