The flat rate VAT scheme is designed to reduce the cost of complying with VAT obligations by simplifying the way small businesses calculate their VAT.

Designed to save time and money – but could it work for you?

Read on to find out more.

How does the flat rate VAT scheme work?

In principle it’s very simple:

  • Sales – you pay a flat % rate of VAT on gross sales
  • Purchases – you cannot claim any VAT back on purchases so you account for them all as gross spends in your accounts
  • Capital spends – the only exception is where you spend £2000 or more on capital purchases, where HMRC does allow you to recover the VAT on the spend if you meet certain criteria.
  • The Flat Rate VAT scheme can be used on a cash basis or accruals basis:
    • cash basis – when your customers pay you
    • accruals basis – when you raise your invoice to your customer

Why would you want to join the flat rate scheme?

  • Save time – the flat rate scheme can save time by removing the need to calculate and record output tax and input tax in calculating the net VAT due to HMRC. The VAT in a period is calculated by applying the flat rate percentage to the tax inclusive turnover for the period.
  • Save money – if you are charging VAT on your sales, but the majority of your purchases are non-vatable supplies, you may find that you can save money by paying less VAT in the flat rate scheme.

Beware: The flat rate % VAT is charged on the gross value of sales as opposed to the standard VAT which is charged on net sales. Keep this in mind when you are running your numbers to see if the flat rate VAT scheme is right for your business.

If you are making supplies to other VAT registered businesses, you will still need to give them a VAT invoice charging VAT at the normal rate for the supply not the flat rate percentage.

Say for example, and this is an extreme example to illustrate the point – that Bob has taxable sales of £25,000 in a quarter, but only £1,000 of taxable purchases and £9,000 of non taxable purchases per quarter. Bob is a photographer so the flat rate % that he would use to calculate his VAT liability would be 11%.

  Standard VAT Rules VAT £ Flat Rate VAT rules VAT £
Sales (Output) VAT  VAT at 20% on net sales of £25,000 5000 VAT at 11% on gross sales of £30,000 3300
 Purchases (Input) VAT  VAT at 20% on net purchases of £1,000  (200)  N/a. Bob cannot recover the VAT on his purchases  0
VAT owed to HMRC 4800 VAT owed to HMRC 3300
VAT charged to his customers 5000
Gain to be posted to Bob’s accounts.This is ‘compensation’ for not being able to recover the £200 of VAT on Bob’s purchases!Quite lucrative in this example! 1700

However, consider this example where Bob has the same taxable supplies of £25,000 in the quarter, but this time, all £10,000 of his purchases are taxable purchases.

  Standard VAT Rules VAT £ Flat Rate VAT rules VAT £
Sales (Output) VAT  VAT at 20% on net sales of £25,000 5000 VAT at 11% on gross sales of £30,000 3300
 Purchases (Input) VAT  VAT at 20% on net purchases of £10,000  (2000)  N/a. Bob cannot recover the VAT on his purchases  0
VAT owed to HMRC 3000 VAT owed to HMRC 3300
VAT charged to his customers 5000
Gain to be posted to Bob’s accounts.This is ‘compensation’ for not being able to recover the £2000 of VAT on Bob’s purchases!In this example, Bob would have lost £300 by being in the flat rate scheme this quarter. 1700

Joining the scheme

You can join the scheme if:

  • you are a VAT registered business
  • and you expect your taxable supplies in the next 12 months to be no more than £150,000

Taxable supplies  – are calculated by looking at the total value of supplies at the positive (ie standard 20%) and zero rates, excluding VAT and the value of any capital assets expected to be sold in the period. Exclude VAT exempt supplies.

First Year Discount

You are eligible for a first year discount of 1% if you are joining the flat rate scheme at the same time you register for VAT. The discount is available until the day before your VAT registration anniversary.

You can’t join the scheme if:

  • You were in the scheme and left during the previous 12 months
  • You are, or have been within the previous 24 months
    • eligible to join an existing VAT group
    • registered for VAT as a division of a larger business
  • You use one of the margin schemes for second-hand goods, art, antiques and collectibles, the Tour Operators’ Margin Scheme, or the Capital Goods Scheme
  • You have been convicted of a VAT offence or charged a penalty for VAT evasion in the last year
  • Your business is closely associated with another business.

Leaving the scheme

A business must usually leave the scheme when turnover increases to £230,000. However, a business can remain in the scheme with HMRC’s written agreement provided it can be shown that total sales in the following 12 months will be less than £191,500 including VAT.

If you leave the scheme – you can’t join again for another 12 months.

Flat rates

HMRC has published a table showing rates applicable to many business sectors. Some examples are:

Category of business carried on Appropriate percentage
Retail of food, newspapers, confectionery 4
Retail of vehicles or fuel 6.5
Photography 11
Estate agency 12
Hairdressing 13
Legal services 14.5
Computer and IT consultancy 14.5
For all other flat rate scheme please refer to the Flat Rate Scheme – New Percentage Rates

The flat rate to be used depends on which trade sector most accurately reflects any particular business. If a business includes supplies in two or more sectors, the percentage to be used is that appropriate to the main business activity as measured by expected turnover in the year ahead.

Most traders with qualifying turnover are eligible to join the scheme, but there are a number of exclusions designed to prevent abuse of the scheme as well as a few to avoid complex interaction with other schemes. The scheme is optional, but traders wishing to join should complete Form VAT 600 (FRS) online (if they used HMRC’s online services to register for VAT) or download and print off the form, then complete and post it to HMRC. (The form is available from the HMRC website at www.hmrc.gov.uk).

Considerations and pitfalls:

Although exempt supplies are excluded from the calculation to determine if you are eligible to join the scheme , the flat rate scheme can cost extra VAT if you make supplies which are exempt from VAT. Flat rate VAT will be payable on the value of all supplies made, including exempt supplies.

The scheme was designed to reduce the admin burden on small business but does sometimes create more admin if the scheme is not managed correctly and corrections have to be made later.

Be careful to choose the most appropriate flat rate to your business trade. It can be expensive to get this wrong.

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