My client has recently registered on a voluntary basis, backdating his registration to 1 April 16. He has also applied for and been accepted onto the flat-rate scheme. I am comfortable with the choice of sector, but am getting conflicting advice regarding the 1% discount available and the situation with recovery on pre-registration costs. Could you please clarify?
Quirks of the flat-rate-scheme
The entitlement to the flat rate 1% discount applies for the first year of VAT registration. For a late compulsory registration, the entitlement runs from the date of notification of a liability to be registered until the day before the first anniversary of the effective date of registration. If a business is more than a year late registering there will be no entitlement to any discount. However in your client’s case as this is a voluntary registration the discount can be applied for the whole of the first year.
This also applies to limited cost traders as the discount can still be applied for the first year giving an effective rate of 15.5%
In respect of input tax recovery, generally, flat-rate businesses are restricted to claiming only for capital expenditure goods costing £2000 or more including VAT. However, Regulation 55F and VAT Notice 733 (paragraph 7.6) confirm that the normal rules apply to pre-registration expenses even for flat-rate businesses. So input tax on overhead services can be claimed if it was incurred within the six months prior to registration and the time limit for goods, , regardless of the value, is four years as long as those goods were still on hand at the effective date of registration.
It should be remembered that if VAT is claimed on capital assets that are later disposed of, the sale must be accounted for at the full standard-rate and not at the flat rate. However, stock purchased prior to registration can be sold on under the flat-rate scheme as Regulation 55C(4) only refers to capital expenditure goods.
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This tax Q&A was published in December 2017 – please be aware that the information above may have changed in subsequent months. This note is written for the general interest of our clients and is not a substitute for consulting the relevant legislation or for taking professional advice.
(This content was originally produced by Croner Taxwise Limited and is reproduced with their permission)