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 is 8.5% (“Sport and Recreation – 8.5%”). Entry eligibility for FRS is expected VAT exclusive turnover of under £150k, and businesses have to leave if VAT inclusive turnover exceeds £230k.
However 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 expenditure on businesses goods of less than 2% of turnover or £1,000, which ever is higher. However the eligible expenditure here is limited:
First it must be goods, not services – that means things like travel, advertising, internet are excluded.
Secondly, some goods are excluded:
(i) vehicles, vehicle parts and fuel
(ii) food or beverages for consumption by the flat-rate trader or employees of the flat-rate trader
(iii) capital expenditure goods
(iv) goods for the purpose of resale, leasing, letting or hiring out except where the main business activity of the flat-rate trader ordinarily consists of selling, leasing, letting or hiring out such goods
(v) goods for disposal as promotional items, gifts or donations
This means that, in particular, the costs of paying other teachers, say as cover or in a studio, don’t count – they are services not goods – and also that retreat costs such as travel and accommodation don’t count. Conversely if you self catered a retreat, the food itself would count, but not the costs of a chef or cook!
If the Limited Cost Trader rules apply then rather than a 8.5% Flat Rate, its 16.5% which equates almost exactly to the Standard VAT Rate of 20% – Flat Rate is always expressed on gross income, Standard Rate VAT 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 8.5% applies, then your vat is £85, 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.
To add to the mix, a scheme exists known as “Tour Operators Margin Scheme” (“TOMS”) which would apply to the retreat income on Standard Rate VAT such that you only pay VAT on the profit element of the retreats. However this is a astoundingly complex set of rules.
Its fair to say VAT is not a simple tax.
