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ACCA Strategic Professional · Advanced Taxation (UK) · Value added tax

Zephyr Ltd, a UK VAT-registered trader, is considering the flat rate scheme. Which of the following statements about the flat rate scheme is correct?

Under the flat rate scheme the trader still charges VAT to customers but pays HMRC a fixed percentage of its VAT-inclusive turnover. In return, input VAT on most purchases cannot be reclaimed, which simplifies record keeping but may cost or save money.

  1. AThe business pays VAT at a fixed percentage of its VAT-inclusive turnover and normally cannot reclaim input VAT on most purchasesCorrect
  2. BThe business pays VAT at a fixed percentage of its VAT-exclusive turnover and reclaims all input VAT as normal
  3. CThe business pays VAT at the standard rate on profit rather than on turnover
  4. DThe business is exempt from charging VAT to its customers

Explanation

Under the flat rate scheme the trader charges customers VAT in the normal way but pays HMRC a fixed percentage of VAT-inclusive turnover. Input VAT is generally not reclaimed, except for certain capital purchases over £2,000 including VAT. The option about VAT-exclusive turnover with full recovery describes a different treatment.

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