Businesses in the hospitality sector will now be charging 5% on many of their sales since the changes announced by the Chancellor and will continue to do so until 12 January 2021. This will also have implications for businesses who are on the Flat Rate Scheme for VAT.
HMRC have updated their list and reduced the flat rate scheme percentages for the following trade sectors:
- Catering services including restaurants and takeaways: reduced from 12.5% to 4.5%
- Hotel or accommodation: reduced from 10.5% to 0%
- Pubs: 6.5% to 1%
Due to the above changes, some VAT registered businesses on the flat rate scheme may find it beneficial to leave the scheme and some businesses not on the scheme may find it useful to join the scheme (even if only temporarily).
Should I leave/join the scheme?
Every business will be different due to the potential supplies with variable VAT rates.
For example, a pub selling mainly alcoholic drinks with little or no food sales would be charging VAT at 20% outside of the flat rate scheme whereas under the Flat rate scheme would only pay 1% on their turnover. This is likely to have the potential for decent VAT savings.
Compare this to a café with mainly “eating in” supplies which would now be 5% and cold food takeaway at 0% when outside the flat rate scheme and 4.5% on the flat rate scheme. In this instance it is likely that the savings will be very little.
Each business will be different and each case looked into on its own merits. If this is something you are considering, you should get in touch as although the flat rate scheme is a simplified scheme for being VAT registered, it can have it’s own little quirks that can catch you out.
Joining the scheme
You may join the scheme at any time and can backdate the scheme application to the start of the last quarter if you haven’t already filed a VAT return for that period.
Only businesses with a turnover of no more than £150,000 a year excluding VAT may join the scheme.
The turnover can go above this once you join the scheme but you must leave the scheme again if your turnover including VAT is greater than £230,000.
There is no minimum period for remaining in the scheme.
Leaving the scheme
Before you calculate whether or not leaving the scheme would be beneficial it is important to remember there are important criteria that must be met when leaving the scheme:
You can leave the scheme at any time, for example if it is worth leaving, you would leave at 14 July 2020 (when the VAT rate changed).
If you do decide to leave the scheme you cannot re-join the scheme for another 12 months. This would mean that you would need to take into account that the VAT rates would revert back to the old rates from 12 January 2021 and this will affect your calculation.
Leaving the scheme means that you need to keep full VAT records for example, full input VAT records (keeping invoices for VAT evidence) and detailed sales records, including splitting sales into 0%, 5% and 20% sales. Therefore the simplicity of preparing the VAT under the flat rate scheme would be lost.
If you have any further queries on VAT and the Flat Rate Scheme, please get in touch.