Changes to Flat Rate Scheme

1. Amendments have been made to the entry and exit tests for businesses who wish to use/are currently using the VAT flat rate scheme for small businesses. The amendments have effect on and after 1 April 2009.
2. The flat rate scheme percentage rates have been amended to reflect the cut in the standard rate of VAT.

Baker Tilly analysis

1. In respect of the scheme entry requirements, until now businesses have had to ensure that their taxable turnover was less than £150,000 and their total turnover (taxable and exempt) less than £187,500. The total turnover test will be removed from 1 April 2009, with the result that entry to the scheme is based solely on taxable turnover.
   
   Currently, businesses with annual income exceeding £225,000 must leave the flat rate scheme. As 'income' is not defined in the VAT legislation, the exit test will be calculated on the basis of the method used by the business to calculate its VAT liability whilst on the scheme. This means that a business calculating the VAT due based on cash received, rather than invoices issued, will look at the annual cash received when determining whether the £225,000 threshold has been exceeded.
2. The adjustments to the flat rate scheme should eliminate any concerns that small businesses using the scheme will be at a comparative disadvantage, given the reduction in the standard rate of VAT. The new percentages can be found in the below table.