Back to basics: reduce your VAT
The Flat Rate VAT Scheme (FRVS) was introduced a couple of years ago to assist small traders to simplify the calculation of their quarterly VAT. The scheme looks at the turnover generated by a business during a quarter and takes a percentage as the VAT payable.
In contrast to standard VAT calculations there is no requirement to compute output VAT on sales and then go through suppliers' invoices to calculate the input VAT that may be offset.
For the hospitality sector the flat rate is 5.5 per cent. For example, if the quarterly turnover of your pub is £30,000, the VAT payable would simply be £1,650, that is 5.5 per cent of the gross takings.
As well as this the flat rate for new licensed trade businesses drops to 4.5 per cent for the first 12 months of trading.
This is seen as a way of softening outgoings and simplifying accounts for start-ups.
And if you purchase high value capital items there are circumstances in which the input VAT you suffer can still be offset against the FRVS-calculated liability.
Here are three types of businesses that may benefit from using FRVS.
Freehold pubs
With no input VAT to be claimed on rent, FRVS may work out cheaper for the freehold licensee. However, for those operating a lease or tenancy the effective rate of VAT is pushed up by the VAT claimable on the rent.
Pubs offering food
While VAT is paid on food sales little VAT can be claimed back on food purchased, so pubs where food represents a reasonable share of take may benefit from choosing FRVS.
Pubs with letting rooms
Letting part of the private accommodation as bed and breakfast brings valuable incremental income with a high profit margin but there is little input VAT to be offset against the sales VAT due. As with pubs offering food, where accommodation represents a reasonable share of weekly takings it may benefit the licensee to apply for FRVS.
But before all you freeholders and pubs offering food and/or accommodation call the VAT office, be warned - there's a catch!
The scheme is aimed at assisting only operators who expect to take less than £187,500 a year. As soon as you believe your next 12 months trade will exceed this limit you must withdraw from the FRVS and join the standard method of calculating VAT.
Only if you are taking less than £3,600 a week or expect sales for the next 52 weeks to average less than £3,600 are you eligible for FRVS.
Any licensee who is trading, or is about to start trading, and who does not expect to take more than £187,500 in their first year should contact an accountant who specialises in the licensed trade.
A review of last year's accounts, the last quarter's VAT return or a projected cash flow will provide sufficient information to make an informed decision.
Mike Marsh is a director of Swindon-based licensed trade accountants Accounting for Hospitality.
