Advantages and Disadvantages of VAT flat rate scheme

Advantages and Disadvantages of VAT flat rate scheme

Advantages and Disadvantages of VAT flat rate scheme

The flat rate VAT scheme allows you to apply a fixed flat rate percentage to the gross turnover to calculate the VAT due to your business and payable to HMRC. The fixed-rate percentage varies for every type of business.

Who is eligible for the Flat Rate VAT Scheme?

You can join the scheme when your business’s VATable turnover is £150,000 or less. 

If your turnover is more than £230,000, including VAT, you would have to leave the scheme. 

You can find out more about the scheme here -

Advantages of the Flat Rate VAT Scheme

The most obvious advantage of using the Flat Rate Scheme is the amount of time you save on record-keeping, which allows for smoother monitoring of your business’s cash flow. This is because, under the scheme, you won’t have to record the VAT you charge on every sale and purchase, and you won’t also need to show VAT separately on your invoices.

A first year discount. If you are in your first year of VAT registration you get a 1% reduction in your flat rate percentage until the day before the first anniversary you became VAT registered.

There are fewer rules to follow on the Flat Rate Scheme since you don’t have to work out which VAT on purchases you can and can’t reclaim. This means less chances of mistakes being made and less worries around any VAT investigations. 

You always know what percentage of your revenue you will have to pay to HMRC therefore the scheme provides cashflow certainty

VAT on larger capital purchases (>£2,000) and VAT incurred pre-registration can still be claimed.

If your VAT purchases are relatively low you could potentially make additional profit. This is because you are not paying over the difference in VAT charged on sales and VAT suffered on purchases, but instead paying a flat percentage.

advantages and disadvantages of flat rate VAT

Disadvantages of the Flat Rate VAT Scheme

There are also disadvantages of using the Flat Rate Scheme. 

The fixed-rate percentages are calculated without taking into consideration any zero-rated and exempt sales. That means that if you do sell goods and services which are primarily zero-rated or exempt then you’ll end up paying more VAT using the flat rate scheme. 

If the VAT on purchases you make would exceed the VAT you charge on sales, then you’ll be worse off under the flat rate scheme. Under this situation you would typically receive a VAT refund using standard accounting, but under flat rate VAT you wouldn’t receive a refund, but instead would have to make a VAT payment to HMRC.

How to decide if the Flat Rate VAT Scheme is right for you

The best way to understand if the flat rate VAT scheme is right for your business is to calculate the impact.

Go through your sales and purchases in the past 12 months, calculate the VAT you would possibly have under the Flat Rate Scheme, and compare the amount with what you have actually paid (if already VAT registered). 

Remember the fixed-rate percentage is applied to the gross (VAT inclusive) revenue and includes zero rated and exempt sales. 

Here is more information about the flat rate VAT scheme

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About the Author

Annette Ferguson 

Owner of Annette & Co. - Chartered Accountants & Certified Profit First Professionals. Helping online service-based entrepreneurs find clarity in their numbers, increase wealth and have more money in their pockets.