VAT QUESTION OF THE WEEK: Flat Rate Scheme – Changes to the Balance of Your Business

VAT QUESTION OF THE WEEK: Flat Rate Scheme – Changes to the Balance of Your Business

Q- My client joined the Flat Rate scheme on 1st January 2016. He is a sole trader carpenter and has a flat rate of 14.5%, but also runs a small DIY shop part time. The shop was previously only open four days per week but the business has expanded, and from March 2018 the shop is open six days per week whilst my client continues to do occasional carpentry jobs. Previously the carpentry income made up the bulk of his turnover. Due to the change in the business, which flat rate percentage should they apply to the gross turnover as they applied 14.5% last year?

A- Our client has a flat rate of 14.5% as a carpenter because the materials supplied form less than 10% of his carpentry income; however, there is also a rate of 9.5% if the materials supplied are 10% or more of the carpentry turnover. As a retailer, he would fall into the category ‘Retailing that is not listed elsewhere – hardware’, which attracts a flat rate of 7.5%.

Where a business fits into two or more sectors, it should apply the percentage for the trade with the highest turnover; it does not apply more than one percentage. Please note, whatever category a business falls into, the limited cost trader rates can still apply if the business is not making sufficient purchases of relevant goods – see VAT Notice 733 section 4.4.

As there has been a change in the balance of the business whilst still doing the same activities as before, our client should carry on using the 14.5% until the start of the VAT period containing the anniversary of joining the scheme.

At that point our client should review which sector is, or is expected to be, the main business activity, again measured by turnover. It is likely that now the shop is open six days a week, if the carpentry side becomes the smaller part of the business he would switch to a flat rate percentage of 7.5% from the period containing the anniversary.

If our client’s flat rate percentage changes he must inform HMRC in writing within 30 days of the change.

For more information regarding the flat rate percentages, see https://www.gov.uk/hmrc-internal-manuals/vat-flat-rate-scheme/frs7200.