What is the VAT Flat Rate Scheme?

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Her Majesty’s Revenue & Customs (HMRC) Value-Added Tax, VAT Flat Rate Scheme has existed since the 2002 Budget. This was introduced for small businesses owners, so they can be relieved of the administrative burden when preparing VAT returns by having them pay roughly the same amount of VAT without the complexity of much paperwork.

The VAT Flat Rate Scheme


The VAT Flat Rate Scheme is also a good way for business owners to increase their profits since the flat rate of VAT they pay HMRC for their sales was often lower than the VAT they charge their customers or clients. Thus, they can pocket some of the difference between the amount charged and the VAT they paid for. 

However, unlike other VAT schemes, business owners who are paying the flat rate usually can’t reclaim VAT on purchases made. However, there are some exceptions for capital assets purchases that cost more than £2,000.

How to Know When a Business Is Eligible for the VAT Flat Rate Scheme

Businesses that want to use the VAT Flat Rate Scheme must apply directly to the HMRC. The qualifications are that they must be VAT-registered and that they have a predicted annual turnover under £150,000 excluding VAT. 

Businesses that cannot join this scheme left the scheme within the past 12 months, those that have committed a VAT offence within the past year, and those closely associated with another business.

Before joining the VAT Flat Rate Scheme, it is highly recommended for business owners to speak to an accountant or a professional tax consultant first to know whether this will be right for their business.


Calculating the Amount to be Paid Under the Scheme

Under the VAT Flat Rate scheme, the business owner pays tax that is calculated by multiplying the VAT Flat Rate by the VAT-Inclusive Turnover. VAT Flat Rates are set according to the business type and the amount it spends on goods.

For example, a business has a VAT-Inclusive Turnover of £20,000 and the VAT Flat Rate is at 10%, the business owner has to pay a flat rate amounting to £2,000 or 10% of £20,000.


The Advantages and Disadvantages of the VAT Flat Rate Scheme

Just like any initiative, the VAT Flat Rate Scheme also has its fair share of advantages and disadvantages.

This scheme helps business owners manage their cash flow, gives them lower fixed rates than the standard rate, and makes for easier record keeping. However, this is not beneficial for business owners who spend very little on goods, like service providers, and regularly buy and sell goods outside the United Kingdom, making the scheme more complex.


The HMRC introduced the VAT Flat Rate Scheme to help relieve business owners of the complexity of preparing VAT returns by having them pay roughly the same amount of VAT or a flat rate without much paperwork. VAT Flat Rates vary depending on the sector the business is operating in.

This scheme also allows business owners to increase their profits because the flat rate paid to HMRC is often lower than the VAT they charged their customers or clients. But unlike other VAT schemes, owners cannot reclaim VAT on purchases made unless the purchase is exempted and over £2,000.

If you have questions about how this applies to your business, feel free to get in touch with Annette & Co.!

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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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