A recent VAT tribunal case has shown that the VAT flat rate scheme has its pitfalls, especially where a business derives its income form more than one trade.
The flat rate scheme can be used by any business whose turnover is less than £150,000.
The scheme removes the need for a business to calculate both its output tax and input tax but instead it calculates how much VAT to pay as a percentage of its turnover, so supposedly making the calculation of you VAT easier. The percentage varies depending upon which category of trade you are in.
Where a businesses turnover is derived from more than one category of trade, the business must use the percentage that applies to the trade which accounts for the majority of its income. This is where the problem arises, a business must decide at the start of its accounting period which trade gives the majority and ensure they choose correctly. If they learn later that they have chosen the wrong category as their main source they could be liable to a further liability.
In the recent case Mr & Mrs Morgan ran a pub which also served food, they had incorrectly thought that drink sales would exceed food sales so had used the pub rate of 5.5%. However food sales exceeded pub sales so the restaurant rate of 12% should have been used.
This reinforces that care should be taken when deciding whether to use the flat rate scheme if your business is not straightforward. Other areas to consider are whether your business may make a number of zero rated sales as this could distort calculations. If thinking of using a flat rate scheme you should always seek advice first.