This Content Was Last Updated on April 6, 2023 by Jessica Garbett
Because of both the retail nature of a yoga business, and the high labour element of sales price, VAT registration for a yoga business can be expensive, and something to be avoided if possible, eg by a restructure on commercial lines into two or more separate businesses.
But supposing you are VAT registered. The Flat Rate Scheme is a useful scheme to simplify record keeping, and it normally saves a Yoga Teacher VAT as the Flat Rate for Yoga Instruction is 12%
A point of confusion – Flat Rate is always expressed on gross income, whereas Standard Rate VAT is expressed on net, eg on £1,000 of cash income:
- Under Normal VAT this is deemed to be £833 net income plus vat at 20% of £167 = £1,000 gross income- the 20% applies to £833
- Under Flat Rate the percentage applies to gross, so a 12% your VAT is £120 – i.e.12%% applies to £1,000
Entry eligibility for FRS is expected VAT exclusive turnover of under £150k, and businesses have to leave if VAT inclusive turnover exceeds £230k.
How It Works
- Assume Trading Income of £50,000 in a quarter.
- The Flat Rate Percentage is applied to gross income to calculate Output Tax. Flat Rate Output Tax due £6,000. This compares to Standard VAT where your Output Tax would be £8,333
- You forego any Input Tax claim, except where you spend more than £2,000 on capital assets / equipment (goods, not services) in one go
- Your Vat for the quarter, in this case, would be £6,000
Beware – the Flat Rate percentage is applied to both Standard Rate and Zero Rate income, so can bring income otherwise outside of VAT into VAT.
Limited Cost Trader
From April 2017 the Limited Cost Trader rules restrict access to the FRS for some businesses with, as the name suggests, limited costs. Limited cost means eligible expenditure on businesses goods of less than 2% of turnover or £1,000/pa, which ever is higher.
To restate this in a more readable way, your expenditure on goods must be at least 2% of turnover subject to a minimum of £1,000pa/£250pq. However the eligible expenditure here is limited:
Expenses that are excluded:
- Vehicle costs including fuel, unless you’re operating in the transport sector
- Food or drink for you or your staff
- Capital expenditure
- Goods for resale, leasing, letting or hiring out if your main business activity does not ordinarily consist of selling, leasing, letting or hiring
- Goods that you intend to re-sell or hire out, unless selling or hiring is your main business activity (if you sell Yoga Mats and Props as part of your Yoga business, this is probably part of your main Yoga activity so these costs would count)
- Goods for disposal such as promotional items, gifts or donations
- Any services
Expenses that may be included – this is not an exhaustive list:
- Stationery and other office supplies
- Gas and electricity – important if these are particularly high for your business, eg Hot Yoga
- Stock for a shop
- Cleaning products
- Software provided on a disk
- Food to be used in meals for customers, eg a cafe
- Goods provided by a subcontractor and itemised separately
For typical yoga businesses this means:
- The costs of paying other teachers, say as cover or in a studio, don’t count – they are services not goods
- retreat costs such as travel and accommodation don’t count.
- If you self catered a retreat, the food itself would count, but not the costs of a chef or cook.
- Studio consumables like mats and props would count
- Studio cleaning and stationery costs would count
- Studio electric and gas would count – useful if you teach Hot Yoga classes.
- If you have a shop or cafe attached to your studio, the purchases for this would count.
If the Limited Cost Trader rules apply then:
- Rather than a 8.5% Flat Rate, its 16.5% which equates to the Standard VAT Rate of 20%*1
- This removes any benefit of using FRS other than simplification of accounting – in cash terms even with a small amount of input tax businesses would be better off on normal VAT
*1 Flat Rate is always expressed on gross income, whereas Standard Rate VAT is expressed on net, eg £1,000 of cash income – under Normal VAT this is deemed to be £833 plus VAT at 20% of £167. Under Flat Rate the percentage applies to gross, so if 12% applies, then your VAT is £120, however if it’s the “limited cost trader” rate of 16.5% then its £165 which is all but the same as the £167 on Normal VAT.
These illustrations give an example of how Flat Rate VAT may work both at normal flat rate 12% and Limited Cost Trader 16.5%, and a comparison to standard VAT: