Flat Rate VAT 6.5%

[doadeer]

My family have a sports business which is studio based. We've grown it from scratch to a thriving small business which we are so proud of. We are now at the VAT threshold but being classed as a limited goods company we need to pay 16.5% VAT. We can't pass this cost on to customers without hiking the prices which we don't want to do.

If we can show we spend £1000 or 2% turnover on goods we can pay 8.5% VAT. Every where I look I can see lists of items NOT included in this but nowhere a clear list of what can be included. Feeling very frustrated. I'm not sure the business could comfortably survive if we need to pay 16.5% VAT in addition to our corporate tax.

Any advice?

What do you spend money on? Goods means physical things like printer cartridges, stationery, small bits of equipment, a telephone, etc. It's impossible to produce a list of "goods" as it would cover so much.

By contrast "services" are things that aren't physical, such as software, broadband line rental, power, utilities, subscriptions, - basically things you can't touch.

We spend on yoga mats, blankets, bolsters but since covid hit we can't use these so they don't need replacing. The main costs are on rent, software, advertising and teachers which isn't included and is a huge percentage.

Sometimes it works out better to buy stuff to sell, even at break even, just to get your "purchases" of goods up to the amount you need to qualify. Can you not start selling sports equipment, or protein drinks/bars, or even normal soft drinks etc?

@user1497207191 I asked accountant about this as yes it would be very easy to sell stock but as she said this isn't the core business function that this wouldn't count!

I actually produce yoga vest tops which could be sold but it's a seperate business.

You need to charge standard rate of 20% on your supplies, the flat rate relates to what you pay over to HMRC - there are only 3 rates of VAT 20%, 5%, 0%. The idea of the flat rate is instead of tracking vat on your income and expenses you just take the gross amount and multiply it by the flat rate and pay that instead to make it easier for the business to manage. It’s a lot less relevant now as most businesses use software and with making tax digital you need to have digital records anyway.

Flat rate vat example:

Net amount of sales: £100,000
Vat charged to customers £20,000

Amount paid on flat rate: £120,000 x 16.5% = 19,600.

The 16.5% rate is because you are a low cost trader.

If the vat on your expenses in this example is more than £400 it wouldn’t be worth joining flat rate and you should just reclaim vat on purchases. If you are a gym I would use accrual vat rather than Cash vat as you presumably don’t have many trade creditors.

Your accountant should be able to advise and guide you on VAT and if they can’t I would suggest you change accountants.

Also doesn’t matter about the vests and whether it is core business, you need to look at what falls within the low cost trader rules and see what you costs you incur and whether you meet the rules or not. Your rate wouldn’t be 6.5% though it would be more like 12% (at a guess).

This is a discussion you should have with your accountant. Do you want to grow the business? If your business is sitting just over the threshold then you may want to consider reducing turnover to keep a higher profit and work less hard. If that isn’t your plan then you need to embrace 20% VAT. You sound like you sell a service predominantly so flat rate VAT won’t work as you are a limited cost trader.

[quote doadeer]@user1497207191 I asked accountant about this as yes it would be very easy to sell stock but as she said this isn't the core business function that this wouldn't count!

I actually produce yoga vest tops which could be sold but it's a seperate business. [/quote]
I think you need a different accountant!

I have experience of 4 accountants and they are all saying the same thing and sharing the same link but not giving me clear detail.

The flat rate is 6.5% for sports and recreation businesses where goods make up more than 2% of turnover. But we don't typically spend this much but we need to as we can't afford to pay 16.5% and have a healthy company. We can't add 20% onto our prices for customers. We are a yoga studio. www.gov.uk/vat-flat-rate-scheme/how-much-you-pay

Sorry I meant to write 8.5% for sports and recreation