Should My Small Business Use the Flat Rate VAT Scheme?

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Before we get on to discussing whether your business should or shouldn’t be on the Flat Rate VAT Scheme, let us first talk about what this scheme is all about.

Simply put, the Flat Rate VAT Scheme is a tax scheme designed by the United Kingdom government to simplify the sales and purchase records of small business owners. It allows you to apply a fixed flat rate percentage to the gross turnover to calculate the VAT due to your business and payable to HM Revenue & Customs (HMRC). The fixed-rate percentage varies for every type of business.

Now that we have that out of our way let’s discuss whether your small business should be on the Flat Rate VAT Scheme or not.

Who is eligible for the Flat Rate VAT Scheme?

In order to qualify and to join the Flat Rate VAT Scheme, your business’s VATable turnover must be £150,000 or less. During your first year on the scheme, a further 1% reduction can also be made from the fixed rate.

If your turnover is more than £230,000, including VAT, you would have to leave the scheme. You may start out on the Flat Rate Scheme and eventually switch to the Standard Rate when your business’s turnover changes or when you find that it would be better to claim back the VAT on your purchases.

Advantages of Being on 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.

In addition, there are also 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 fewer mistakes for you, fewer worries, and you can be certain whenever you’re computing your VAT because you always know which percentage of your takings you will need to pay to HMRC. 

Potential Disadvantages of Being on the Flat Rate VAT Scheme

However, just like any other schemes, there are also potential disadvantages of using the Flat Rate Scheme. It would be best if you remembered that the fixed-rate percentages are calculated without taking into consideration any zero-rated and exempt sales. Besides, there is also an allowance for the VAT that a business is allowed to spend on their purchases.

These are the reasons why the Flat Rate Scheme is not recommended for businesses that purchase mostly standard-rate items because VAT cannot be reclaimed on these purchases, businesses that regularly receive VAT repayment under the Standard VAT accounting, and businesses that make a lot of zero-rated or exempt sales.


3 Possible Expenses to Look into Before Applying to be in the Flat Rate VAT Scheme

Suppose you are seriously considering joining the Flat Rate Scheme for your business. In that case, we advise that you first go through your sales and purchases in the past 12 months, calculate the VAT remittances you would possibly have under the Flat Rate Scheme, and compare the amount with what you have actually paid. Evaluate the difference between the two amounts if this is worthwhile. Just remember that you should add 20% VAT to your turnover before applying the fixed-rate percentage.

You should also look into your plans for your business, including possible business expansion and purchases for the year, so you can avoid these common wasteful mistakes. Here are the following expenses you should take note of as you plan ahead:


Capital Expenditure

Capital Expenditure is the amount you spend on goods that you are going to use for your business for a period of time. Examples of this are equipment and materials that will be used or will be purchased for your business. Under the Flat Rate Scheme, you will not be able to claim input VAT on any equipment purchase unless the value of each purchase exceeds £2,000. So if you’re planning to buy equipment that costs £1,500, you won’t be able to claim the VAT for this under the Flat Rate Scheme.

If you are planning to employ, let’s say, a builder for your business expansion, even when he includes the cost of materials in the final bill and the costs exceed £2,000, no VAT is still claimable under this scheme. However, if you were under the normal VAT scheme, this is claimable.

Rental Income

If you have rental income, it is classed as business income because it exploits land for profit. Under the Flat Rate Scheme, the flat rate percentage would also apply to it. However, under the normal VAT scheme, this income would be exempt, which makes joining the Flat Rate Scheme just wasteful for your business.


Cars Owned by the Business

In most cases, it is best for cars to be owned privately. When a business buys a car, no VAT can be claimed. The sale of cars would also not be subject to output tax under the normal VAT scheme. However, under the Flat Rate Scheme, the sale of a car would count as a turnover, and the flat rate percentage has to apply to it, which will end up being costlier for your business.



Should your business apply to be in the Flat Rate Scheme? The answer used to be a simple yes. However, it is recommended that before you apply for this scheme, you first go over your business’s sales and purchases in the past year and take into consideration any purchase you are planning to make for your business in the next year. 

There are cases when the Flat Rate VAT Scheme is beneficial for your business, but there are also other cases when joining the scheme would just end up being wasteful for your business.

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Annette Ferguson

Annette Ferguson

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

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