As businesses change and evolve they often want to leave the flat rate VAT scheme because they’ve become ineligible or there is another VAT scheme that becomes more suitable. Leaving the flat rate scheme is simple enough to do. This guide walks you through how to deregister from the flat rate scheme, when to leave and how to handle accounting for final VAT returns.
Updated 20 July 2021
Table of contents
1.Who Should Leave the Flat Rate Scheme?
Businesses find themselves needing to leave the flat rate VAT scheme for a variety of reasons including:
- They no longer meet the criteria to be part of the scheme** and wish to move to another VAT scheme;
- Being part of the VAT flat rate scheme is no longer beneficial because VAT on purchases have increased meaning they are paying more VAT than they should;
- They are affect by the rules of Limited Cost Trader.
** You cannot use the flat rate VAT scheme if you expect your taxable turnover to exceed £150,000 in the next 12 months.
Once you deregister for the flat rate scheme, you cannot re-join for another 12 months.
2. How to Deregister from 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
Upon receipt HMRC will tell you when your leaving date will be and send instructions on filling out your final flat rate VAT return.
3. When to Leave the Flat Rate VAT Scheme
When you leave the scheme HMRC will tell you your leaving date. Traditionally, if you have yourself ineligible, your leaving date will be determined by HMRC by using the following criteria:
- For quarterly VAT returns, the end of the VAT period containing your joining anniversary.
- For 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;
- If you are joinging the tour operator scheme auctioneer or second-hand goods scheme, the beginning of the VAT period in which you decide to use the new scheme.
4. Tips on Filling In Your Final Flat Rate VAT Return
When it comes to filling in your final VAT return, the numbers you need to include will depend on whether you use cash or invoice accounting.
4.1 Cash Accounting
If you use cash accounting for VAT, you should include tax on purchases as you normally would up until the date that you leave the scheme and 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.
4.2 Invoice Accounting
If you use invoice accounting for VAT then you’ll include output tax on all the invoices you raise up to the point where you leave the flat rate scheme, using your flat rate percentage. Any future sales invoices will be included on your next VAT returns according to invoice date but using the standard rate of VAT (or applicable rate for your business).
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.
5. 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 below £2,000. 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 the 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 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.