The VAT Flat Rate scheme is intended to offer businesses a simpler way to calculate their VAT liability.
This can become a little more complicated when it comes to thinking about businesses that have additional sources of income. A great example of this is income from property rental. We have put together an explanation on how the VAT flat rate scheme applies to those who have buy-to-let properties.
How does the Flat Rate scheme work?
Under the Flat Rate Scheme, your VAT liability is calculated as a specific percentage of your income. The percentage applied depends upon the nature of the main business. For example, if you are a photographer your flat-rate percentage is 11%.
It’s important to note that in the Flat Rate Scheme, no distinction is made between income that is standard-rated, zero-rated or exempt – the percentage is applied to all of your income.
Find out more about HMRC’s VAT flat rate scheme here.
What about rental income?
Income from residential lettings such as buy-to-let properties is exempt from VAT, so when using traditional VAT accounting this income would be excluded from your ‘VATable’ turnover.
If you are using the Flat Rate Scheme however, all of your income must be included and so if your business has a buy-to-let property then the flat-rate percentage will be applied to that income.
What’s the impact on your business?
If you are registered for VAT as a sole-trader the VAT registration covers all the income that you receive, including that from buy-to-let properties.
If you are a VAT registered photographer, trading as a sole-trader, and invest in a buy-to-let property in your own name which earns rental income of £700 per month, you will need to pay over VAT of £77 per month (£700 @ 11%) on this income to HMRC.
What can you do?
If it is at all possible, avoid purchasing investment property within the same entity as your business. If you are a sole trader then purchase the property in joint names. If you trade through a company then purchase the property in your own name.
If this is not practical, then consider whether the flat rate scheme is still the best option for you when taking into account the rental income. You can leave the scheme at any time by notifying HMRC.
If you need any help or advice about the VAT flat rate scheme, or any other property income issues, please book a call with Kathryn from Greenwood Tax and Accounting here.
