What Is the VAT Flat Rate Scheme and How Does It Work?
The amount of VAT a business pays/claims back from HMRC is usually the difference between the VAT charged to customers and the VAT the business pays on their own purchases.
With the Flat Rate Scheme:
- You pay a fixed percentage of VAT to HMRC (this percentage depends on what your business’s trade is)
- You keep the difference between what you charge your customers and pay to HMRC
Types of Sales
The following sales need to be included in your VAT return:
- Standard-rated
- Reduced-rated
- Zero-rated
- Exempt
The following sales do NOT need to be included:
- Sales that are outside the scope of VAT
Claiming Back VAT on the Flat Rate Scheme
With the Flat Rate Scheme, you can’t claim back any of the VAT you made on purchases.
However, there is one exception if you buy a capital asset that costs £2,000 or more including VAT.
Percentages of Sales on the VAT Flat Rate Scheme
The percentage of VAT you pay depends on what your business’s trade is.
During the first year your business is registered for VAT, you get a 1% discount on the percentages.
What to Do if Your Business Fits More Than One Category
If your business fits into more than one category due to making different kinds of sales, you’d choose the percentage that applies to the majority of your sales.
VAT Flat Rate Scheme Eligibility
Your business will need to meet the following criteria in order to join the Flat Rate Scheme:
- Your estimated VATable sales for the next year must be less than £150,000
- Once joined, you can remain in the scheme until your total business income goes above £230,000 a year
Businesses that cannot join the Flat Rate Scheme:
- You were previously in the scheme & left it less than 12 months ago (you can re-join once 12 months have lapsed)
- Your business is closely associated with another business
- You’ve been guilty of a VAT offence within the last 12 months
- You’ve been charged a penalty for evading VAT within the last 12 months
- Your business is closely associated with another business
- you are, or have been within the last 24 months, a member or potential member of a VAT group, or registered for VAT as a division of a larger business
Benefits of the VAT Flat Rate Scheme
- Can save you money (although it’s not been designed for this purpose)
- Makes record-keeping simpler (because you don’t have to work out what VAT you can claim on your purchases)
When to Avoid the Flat Rate Scheme
- If you make a lot of VAT exempt sales
- If you make a lot of zero-rates sales
- If you buy a lot of standard-rated goods or services
This is because it’s likely that you’d end up paying more in VAT than you otherwise would. Businesses outside of the Flat Rate Scheme would normally be intitled to a quarterly VAT repayment from HMRC, which would be lost if they joined the Flat Rate Scheme.
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