Understanding the Flat Rate VAT for Gym's and small businesses
The Flat Rate scheme was designed to encourage small businesses to register for VAT and to reduce the administrative burden rather than to give small businesses a tax break.
To qualify for the flat rate VAT Scheme your business’s turnover must be less than £150,000 (excluding VAT). Your VAT taxable turnover is everything that you sell during the year that is liable for VAT. It includes standard, reduced rate, or zero rate sales or other supplies. For gym businesses, this will mean that nearly everything is included in the calculation, and it Is quite rare to have exempt supplies. The scheme eligibility excludes the actual VAT that you charge, VAT exempt sales and sales of any capital assets. It will also exclude any grants you received from the government related to Covid.
Once you join the scheme you can stay in it until your total business income is more than £230,000.
Under this scheme, you charge VAT at the appropriate rate (currently 20%) but pay VAT to HMRC at a lower rate. This rate will depend on the type of business you operate. A gym-based business would charge 8.5% (at the time of writing).
The business would then keep the difference between what you change your customers and what you pay to HMRC. However, you cannot reclaim the VAT on your purchases except for certain capital assets over £2,000.
The flat rate you use will depend on whether you are classed as a ‘limited cost business’ and the type of business you are in.
A business is classed as a limited cost business if goods cost less than either;
2% of turnover
£1,000 a year (if costs are more than 2%)
If you are classed as a limited cost business, you will pay VAT at the higher flat rate of 16.5%.
Work out if limited cost: click here
Relevant goods do not include for example:
- vehicle costs such as fuel
- food and drink for you or your staff
- capital expenditure
- goods that you then sell
- any services (accountancy, advertising, leases, rent, software, stamps, postage)
- gas and electricity
- cleaning products
- Food used in meals for customers
- Goods provided by a subcontractor and itemised separately
Who can’t join the Flat Rate Scheme
- You were in the scheme and left during the previous 12 months
- You are, or have been within the scheme in the previous 24 months
- You are eligible to join an existing VAT Group
- You have been convicted of a VAT offence
- Your business is closely associated with another business
More information on the Flat Rate Scheme can be found here.
Flat Rate Scheme dos and don’ts
- Join the Flat Rate Scheme if you have lower than average VAT-rated costs, but not if you make a lot of zero-rated or exempt sales.
- Assess the pros and cons carefully (get an accountant to help you) before joining the Flat Rate Scheme and classify your business correctly at the outset.
- Remember the flat rate is applied to sales + standard VAT rate, so you charge customers the standard VAT rate and apply the flat rate to total sales (including VAT) at the end of the quarter.
- Issue and retain VAT invoices
- Maintain good records – this means a VAT account and records of the flat rate percentage applied.
- Use Making Tax Digital (which effectively means use software. More information here.)
- Do not apply Flat Rate Scheme to capital disposals: VAT should be calculated under the full VAT regime.
- Don’t try to backdate your registration retrospectively, you can only go back to the beginning of the current tax period.
- Attempt to use it to avoid outstanding or undeclared VAT liabilities.
If you would like any help in understanding how the Flat Rate Scheme applies to your business, please book a call to see if I can help you. Book a call.