Although there are benefits to the VAT flat rate scheme which is available to small businesses there are some pitfalls that can easily be overlooked. For further details on scheme HMRC - VAT Flat rate scheme for small businesses.

The main principle of the Flat Rate Scheme (FRS) is that the VAT paid to HMRC is based on a flat rate percentage (determined by type of business) being applied to the gross income of the VAT registered trader.

Gross income includes all business income (zero rated and exempt) unless it falls outside the scope of VAT. As land income is considered as business related under the VAT regulations then VAT could become payable on property rental income.

Therefore under the FRS it would be quite easy to overlook paying VAT on zero rated and exempt income related to the business such as property rental income and sale of business cars.

As an example a sole trader who has rental income (even if income separate to business such as income from a residential letting) then VAT would be payable on the rental income at the flat rate applicable. This would not apply to jointly owned properties in this scenario.

When assessing the advantages of using the FRS the effect of any zero rated/exempt exempt income should be considered.

Please contact us for further advice or assistance concerning the VAT Flat Rate Scheme.