VAT Flat rate
The VAT flat rate scheme was introduced for small business owners to relieve the administrative burden when preparing VAT returns.
The VAT Flat Rate Scheme
Using the standard method for VAT , the amount of VAT a business pays or claims back from HM Revenue and Customs (HMRC) is the difference between the VAT charged by the business to customers and the VAT the business pays on their own purchases.
With the Flat Rate Scheme:
you pay a fixed rate of VAT to HMRC
you keep the difference between what you charge your customers and pay to HMRC
you cannot reclaim the VAT on your purchases - except for certain capital assets over £2,000
How to Know When a Business Is Eligible for the VAT Flat Rate Scheme
Your VAT turnover must be £150,000 or less (excluding VAT), and you must apply to HMRC to join the scheme.
You can join the scheme online when you register for VAT.
You can also fill in VAT600 FRS and either:
email it to firstname.lastname@example.org
send it by post
Do not use the address on the form - send it to the following address instead.
HM Revenue and Customs,
You’ll get confirmation you’ve joined the scheme through your VAT online account (or in the post if you do not apply online).
You can choose to leave the scheme at any time. You must leave if you’re no longer eligible to be in it.
You must leave the scheme if:
you’re no longer eligible to be in it
on the anniversary of joining, your turnover in the last 12 months was more than £230,000 (including VAT) - or you expect it to be in the next 12 months
you expect your total income in the next 30 days alone to be more than £230,000 (including VAT)
To leave, write to HMRC, and they will confirm your leaving date.
You must wait 12 months before you can rejoin the scheme.
HM Revenue and Customs
You cannot use the scheme if:
you left the scheme in the last 12 months
you committed a VAT offence in the previous 12 months, for example, VAT evasion
you joined (or were eligible to join) a VAT group in the previous 24 months
you registered for VAT as a business division in the previous 24 months
your business is closely associated with another business
you’ve joined a margin or capital goods VAT scheme
You cannot use the scheme with the Cash Accounting Scheme. Instead, the Flat Rate Scheme has its own cash-based method for calculating the turnover.
Before joining the VAT Flat Rate Scheme, you should speak to a qualified accountant to ensure your business uses the correct scheme.
Calculating the Amount to be Paid Under the Scheme
Under the VAT Flat Rate Scheme, you pay VAT on your VAT inclusive revenue (which is charged at your normal VAT rate for your goods and services, typically 20%) multiplied by your flat rate percentage.
You still charge VAT at 20% under the flat rate scheme. It is just the amount you pay that is subject to the flat rate percentage.
The flat rate percentage you apply depends on the sector your business operates, and you can find all the percentages here - https://www.gov.uk/vat-flat-rate-scheme/how-much-you-pay
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.
If your business is deemed a ‘limited cost business’ by HMRC, you cannot use the flat rate for your sector and instead will have to use 16.5% as your flat rate percentage.
What is a ‘limited cost business’?
You’re classed as a ‘limited cost business’ if your goods cost less than either:
- 2% of your turnover
- £1,000 a year (if your costs are more than 2%)
Where this is the case, you have to use 16.5% as your flat rate percentage.
The Advantages and Disadvantages of the VAT Flat Rate Scheme
Want to know if the scheme is right for you and your business?
Here are the advantages and disadvantages, along with an exercise to calculate if you will be better or worse off using the scheme - https://www.annetteandco.co.uk/advantages-and-disadvantages-of-vat-flat-rate-scheme/
Other VAT schemes you might want to consider include: