To answer the first one, no, VAT is not payable on interest. Interest is an exempt supply and so is not normally included in VAT calculations.
However, the answer to your second question is yes, interest is included int he calculation of your turnover for the Flat Rate Scheme.
Refer your accountant here for HMRC's guide to FRS. Specifically, section 6.2 where it states
What must I include in my flat rate turnover?
Your flat rate turnover is all the supplies your business makes, including VAT. This means all of the following:
* the VAT inclusive sales and takings for standard rate, zero rate and reduced rate supplies
* the value of exempt supplies, such as rent or lottery commission. You can find out more about exempt income in Notice 700 The VAT Guide
* supplies of capital expenditure goods, unless they are supplies on which VAT has to be calculated outside the flat rate scheme in accordance with paragraph 15.9 and
* the value of any despatches to other Member States of the EC if you are making intra EC supplies. For details see Notice 725 The Single Market.
Note: As exempt and zero rate supplies are included in flat rate turnover you apply the flat rate percentage to the exempt and zero rate turnover. You may pay more VAT by being on the scheme if these supplies are a larger proportion of your business turnover than the average for your trade sector.
Your flat rate turnover is all the supplies your business makes, including VAT. This means all of the following:
* the VAT inclusive sales and takings for standard rate, zero rate and reduced rate supplies
* the value of exempt supplies, such as rent or lottery commission. You can find out more about exempt income in Notice 700 The VAT Guide
* supplies of capital expenditure goods, unless they are supplies on which VAT has to be calculated outside the flat rate scheme in accordance with paragraph 15.9 and
* the value of any despatches to other Member States of the EC if you are making intra EC supplies. For details see Notice 725 The Single Market.
Note: As exempt and zero rate supplies are included in flat rate turnover you apply the flat rate percentage to the exempt and zero rate turnover. You may pay more VAT by being on the scheme if these supplies are a larger proportion of your business turnover than the average for your trade sector.
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