I have made a very surprising discovery about the flat rate scheme. A VAT registered business has the choice between
- Accounting for VAT on the basis of sales invoices raised in a quarter, minus purchase invoices received from their suppliers in that quarter OR
- The cash basis which is customer receipts minus supplier payments.
For most businesses the cash basis is better, you only pay over the output tax to HMRC after your customer has paid you.
The Flat Rate Scheme is available to smaller businesses. Under the flat rate scheme you would normally ignore the VAT you have been charged by your suppliers and pay HMRC a fixed percentage of your GROSS turnover ( i.e. including the VAT you have charged your customer). The applicable percentage is determined by the sector in which the business operates.
The flat rate scheme can be really good for people who effectively sell their time, where the amount of VAT that they could claim back is quite small.
What I now discovered is, even when you are using the cash basis under the flat rate scheme, you can still get relief for bad debts. This is the case even though, under the cash basis, you won’t have paid any VAT to HMRC, because your customer has not paid you. Here is a the link to the HMRC notice with a worked example. It’s paragraph 14.2
