Flat rate schemes
Tertiary legislation about the VAT Flat Rate Scheme and the Agricultural Flat Rate Scheme (originally published in VAT Notice 733).
The following text has force of law under VAT Regulations 1995, regulations 55A to 55V, 57A and 69A and was originally published in VAT Notice 733
1. Keeping records and filling in your VAT return — keeping special records
You must keep a record of your flat rate calculation showing:
- your flat rate turnover for the VAT accounting period
- the flat rate percentage you have used
- the tax calculated as due
- the amount you spend on relevant goods
This record must be kept with your VAT account.
2. The basic turnover method — special rule for certain invoices issued or payments received after 23 November 2016 and before 1 April 2017
If (a) you issue a VAT invoice in the period starting with 24 November 2016 and ending on 31 March 2017 and the invoice is in respect of services to be performed on or after 1 April 2017, or (b) if you receive any payment in respect of those services in that period, the supplies of those services shall, to the extent covered by the invoice or payment, be treated as taking place on 1 April 2017 for the purposes of ascertaining your relevant turnover. If the invoice or payment covers services to be performed in a period spanning 1 April 2017, an apportionment based on a fair and reasonable method should be made.
3. The cash based turnover method
3.1 Using the cash-based turnover method
You’ll need to follow the rules, for:
- cash (coins or notes) you receive payment on the date you receive the money
- cheques you receive payment on the date you receive the cheque, or the date on the cheque, whichever is the later ― if the cheque is not honoured you do not need to account for the VAT, however if you have already accounted for the VAT you can adjust your records accordingly
- giro, standing order or direct debit you receive payment on the date your bank account is credited with such a payment
- credit or debit card you receive payment on the date you make out a sales voucher for a credit/debit card payment (not when you actually get paid by the card provider)
3.2 If you received a payment ‘net of deductions’
If you receive a net payment, you must include the full value before such deductions (and including the relevant VAT) in your scheme turnover. This will usually be the value shown on your sales invoice.
3.3 If you receive payments in kind (for example, barter, part exchange)
If you’re paid fully or partly in kind, such as by barter or part exchange, you must include the value including VAT in your flat rate turnover each time you make or receive a ‘payment’. You receive ‘payment’ on the date you receive the goods or services agreed in lieu of money.
3.4 If you want to stop using the cash-based method
If at any time you stop using the cash based accounting method, you must account for VAT on all the supplies made by you while you were using the method for which payment has not been received.
3.5 Special rule for certain payments received after 23 November 2016 and before 1 April 2017
If you receive a payment in the period starting with 24 November 2016 and ending on 31 March 2017 and the payment is in respect of services to be performed on or after 1 April 2017 the supplies of those services shall, to the extent covered by the payment, be treated as taking place on 1 April 2017 for the purposes of ascertaining your relevant turnover. If the payment covers services to be performed in a period spanning 1 April 2017, an apportionment based on a fair and reasonable method should be made.
4. The retailer’s turnover method
4.1 What to include in your daily takings
You must include and record the following in your daily takings as they are received from your customers:
- cash
- cheques
- debit or credit card vouchers
- Switch, Delta or similar electronic transactions
- electronic cash
4.2 What non-cash sales to include in daily takings
In addition to cash payments you must add the following to, and record in, your daily takings, on the day you make the supply:
- the full value of credit sales
- the cash value of any payment in kind for retail sales
- the face value of gift, book and record vouchers redeemed
- any other payments for retail sales
4.3 Making adjustments to your daily takings
If you wish to adjust your daily takings, the following rules apply
- you must be able to provide evidence to support any adjustments to your daily takings figure
- if you make an adjustment but receive a payment later, the amount must be included in your daily takings
- you must not make any reductions from daily takings for till shortages that result from theft of cash, fraudulent refunds and voids or poor cash handling by staff
For further details about cash handling, read Point of Sale Retail Scheme VAT Notice 727/3.
5. Leaving the scheme — making a stock adjustment
The following steps explain how you make the adjustment
Step 1 - Work out the VAT exclusive value of stock on hand on which you had recovered input tax before you joined the Flat Rate Scheme. If you were previously on cash accounting, this will be based on stock you had paid for. For the example use £10,000.
Step 2 - Work out the VAT exclusive value of stock on hand on which you will be unable to recover input tax after you stop using the Flat Rate Scheme. For example, use £20,000.
Step 3 - Subtract the figure at Step 1 from the figure at Step 2. If the figure at Step 1 is larger than the figure at Step 2, you will not be entitled to the adjustment. No further action is necessary. For example, £20,000 - £10,000 = £10,000.
Step 4 - Multiply the result of Step 3 by the standard rate of VAT. For example £10,000 × 20% = £2,000.
Step 5 Claim the VAT calculated at Step 4 in the VAT recoverable portion of your VAT account in the first return you make after leaving the Flat Rate Scheme. £2,000 recoverable from HMRC as a result of FRS stock adjustment.
The first page of the VAT 98 form carries the force of law under Regulation 204(c) of the VAT Regulations 1995.