Leaving the flat rate scheme is simple enough to do. This guide walks you through not just how to leave but also when to do it and what the implications are.
Should You Leave the Flat Rate Scheme?
You can leave the VAT Flat Rate Scheme either through choice or if you no longer meet the criteria to use it.
People often need to leave for various reasons including:
- Being part of the VAT flat rate scheme is no longer beneficial because your VATable purchases have gone up;
- Falling into the criteria of Limited Cost Trader;
- Their turnover has increased beyond the threshold for the Flat Rate Scheme.
As businesses change and evolve they often become ineligible for the VAT Flat Rate Scheme.
Common reasons include:
- At the anniversary of the start date with the Flat Rate Scheme, total invoiced including VAT in the previous year is more than £230,000 (or the total amount paid if using the cash reporting);
- The total value of income for the next 30 days alone will be more than £230,000. This excludes all sales of capital assets;
- Changes in trade mean the business now needs to operate under a different VAT scheme such as tour operator, auctioneer or second-hand goods scheme.
What Date Should You Leave?
If you are voluntarily leaving the scheme, then you can choose the most appropriate date that suits you.
However, it may make sense to make this match the end of a VAT quarter to make your reporting easier.
If you have found yourself ineligible then HMRC sets out guidance to determine your official leaving date.
The leaving date you choose is one of the following:
- If you send quarterly VAT returns, the end of the VAT period containing your joining anniversary. If you send in annual VAT returns your leaving date will be the end of the month after the month containing your FRS anniversary, or the end of your current annual VAT period, whichever comes first;
- the beginning of the period of 30 days;
- the date you became a tour operator or the beginning of the VAT period in which you decide to use the new scheme.
How to Leave the VAT Flat Rate Scheme
You need to write to HMRC to advise them that you wish to leave the flat rate scheme.
The letter needs to include the date you need to leave as well as a short explanation as to why and how you will continue to report your VAT to HMRC.
You then need to post or email your letter to:
HM Revenue and Customs – National Registration Unit
77 Victoria Street
Leave the Flat Rate Scheme Letter Template
How to Complete Your Final VAT Return
How you fill out your final VAT return on leaving the scheme depends on whether you use cash or invoice accounting.
You should include output tax as you normally would up until the date that you leave the scheme.
So you include output tax on any cash sales you have collected in your VAT period as normal.
Moving forward you must account for any future cash collections under the rules of your new VAT scheme.
If you include output tax on your VAT return according to when you raise invoices then you include all the invoices you have raised up to the point where you leave the flat rate scheme, using your flat rate percentage. You then include your invoices on your future returns, according to the invoice date as you did previously but using the applicable percentage as set out in the rules of your new scheme.
Note: if you leave the flat rate scheme in the middle of a VAT return period then you will need to do two calculations for your old and new scheme, add them together and disclose this figure on your VAT return.
Claiming for VAT on Stock When Leaving the Flat Rate Scheme
When you are part of the VAT Flat Rate Scheme you don’t claim the VAT on your purchases.
However if you have left or are planning to leave and have stock on hand, then you may be eligible to claim input VAT on this stock if you move to a standard VAT scheme.
Step 1 Value Your Stock at Cost
Firstly you need to value your stock (at the VAT exclusive amount).
This may involve you doing a stock take at the date you leave the flat rate scheme and then working out the cost of your stock.
Although a formal stock take is not mandatory by HMRC, you do need detailed records of how you costed your stock. So a stock take may help you to achieve the paperwork and calculations more easily.
Step 2 Deduct the Cost of Stock Which You Won’t Be Able to Recover Input VAT on
If you have any stock on which you would be unable to claim back VAT on after you leave, then deduct this from the figure you have calculated in step 1 above.
For example, if the stock you purchased was bought from someone who was not VAT registered.
Step 3 Multiply the Amount of Eligible Stock by the Standard VAT Rate
Once you have deducted the cost of stock that you won’t be able to recover VAT on from your stock on hand in step 1, multiply this figure by the standard rate of VAT which is currently 20%.
Step 4 Claim the VAT calculated
You can now claim for the VAT you calculated in step 3 in the first VAT return you submit after leaving the Flat Rate Scheme.
Anita is a Chartered Accountant with over a decade of experience taking self-employed business owners from financially confused to business savvy.
She is the creator of the ‘Go Self Employed’ website, which is her corner on the internet where she makes self-employment less terrifying.