Question about flat rate VAT and previous VAT problems

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    Hello, I’ve recently started trading as a limited company and looking at voluntarily trading for VAT. I’m currently in discussion with a very good supplier who would prefer to deal with VAT registered customers but I also think it may reflect well on other parts of my business as I will be offering a service to other businesses and have found in the past that a lot would prefer to deal with somebody who is registered for VAT.

    My first question – I’ve been looking at the flat rate VAT scheme but don’t have a clue what category would suit best, at the moment I will be retailing hardware (tools and fittings) online to a mix of private and business customers. I will also be taking on small welding & fabrication jobs for business customers. I may look at adding more services to the business in the future. Do I choose the type of business that the majority of the company will be doing or is there an option to choose more than one VAT flat rate? Under these circumstances would it be better to go for standard VAT rather than VAT flat rate scheme?

    My second question, although this is more of a concern rather than a question – In the past I traded as a VAT registered sole trader (mostly welding & fabrication and the VAT registration was voluntarily), at that time my account keeping was pretty dire and through my own carelessness I was late on a few VAT returns and ended up with a few penalties. My bookkeeping skills have improved quite considerably, I use account keeping software now rather than an accounts book (I used an old accounts book when trading as a sole trader) and also have an accountant who checks everything over when submitting returns. Are these issues likely to cause any problems with HMRC for my company or myself in the future. A part of me thinks register for VAT but make sure all accounts are kept correct and up to date at all times and all returns are delivered on time, another part of me is hesitant to register, mainly due to stories I’ve been hearing from friends (who have never had a business never mind a VAT registration).

    Any advice or views on this would be appreciated.


    Apologies late reply.

    Answer to Question 1:

    You need to select which category is the closest match to your business activities and if you have more than one type of business activity, the flat rate category should reflect the one that generates the highest level of income.
    It is very important that you make a note in your files as to the reasons why you have chosen the category – this is necessary in case you ever need to show HMRC why you decided the category you had chosen was the best fit.

    HMRC’s VAT Notice 733: Flat Rate Scheme for small businesses covers the issue of choosing the correct VAT sector and section 4.2 says: “HMRC will not change your choice of sector retrospectively as long as your choice was reasonable. It will be sensible to keep a record of why you chose your sector in case you need to show HMRC that your choice was reasonable.”

    On 23rd November 2016 HMRC announced changes to the flat rate scheme from April 2017 with regards to a new flat rate scheme category, the ‘limited cost trader’ – we have written an article below which should be read in conjunction with this article: HMRC says that a limited cost trader is a business that buys only a few goods. More specifically, a limited cost trader’s spend on goods, including VAT, in a quarter is: less than 2% of its VAT-inclusive sales for that quarter,or more than 2% of its VAT-inclusive sales for that quarter, but less than £250. If it turns out that you are a limited cost trader, you need to apply the 16.5% limited cost trader percentage to your VAT-inclusive sales for that quarter when you’re working out how much to pay HMRC – don’t use the usual rate for your trade.

    Answer to Question 2: 
    It is important to keep proper records and filing in place. If you are unable to find the funds to bring your account up to date immediately, one option is to speak to HMRC about the possibily of a Time to Pay (TTP) arrangement. This lets a company settle its tax arrears through a series of monthly repayments rather than having to pay the whole amount at once.

    if you need assistance with having an accountant maintaining your books and filing returns, please let me know.

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