VAT Flat Rate Scheme and buy to let property ownership

Many self-employed consultants take advantage of the Flat Rate Scheme for VAT accounting as a way to reduce the level of administration work required. Whilst the record keeping may be more straightforward, care should be taken in choosing to use the Flat Rate Scheme if the individual has other sources of income.

VAT returns for Flat Rate Traders are calculated by applying a percentage to the total of relevant income and paying that over to HMRC. So instead of paying to HMRC the 20% VAT charged to customers less VAT incurred on expenses, the trader just pays a percentage of the total income over. There is no requirement to keep detailed records of expenditure to calculate the VAT liability.

Relevant income, when calculating the turnover to be included on the Flat Rate Scheme return includes VAT inclusive income from standard rated, reduced rate and zero rate supplies plus the value of exempt income, such as residential rent.

For a self-employed consultant, who owns a buy to let property, this would result in them paying a percentage of their rental income to HMRC, as set out in the example below:

1. Normal Accounting

Accounting zero rated table

2. Flat Rate Scheme accounting

Accounting zero rated table

Similarly issues can arise for traders selling goods to EU business customers, and a loss of VAT recovery on UK costs could result for a consultant who supplies their services to an EU business.

Joining the Flat Rate Scheme is a decision which should be taken with care and reviewed regularly on the basis of a person’s circumstances. In particular, since the inception of the special 16.5% rate for limited cost traders, using the scheme is far less likely to save VAT. Its use may still be justified to benefit from the simplicity of records required. Separating income from letting and other services, by operating through a limited company may be effective, but will give rise to other taxation considerations.

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