The VAT Flat Rate Scheme is tough to understand – and even trickier to determine if it’s worthwhile applying for. Whilst it’s by no means mandatory (unlike registering for VAT), it may prove beneficial.
No doubt you’ll have a lot of questions, from ‘what is the Flat Rate VAT Scheme?’ to ‘how does the Flat Rate Scheme work?’ We’ve provided the answers to these below, along with the eligibility criteria, how to apply for the Flat Rate Scheme, the different percentages, how its calculated, and its advantages and drawbacks.
With these, you’ll be able to fully understand whether the scheme is for you.
What is the VAT Flat Rate Scheme?
The usual process for VAT is to pay it to (or claim it back from) HMRC by working out the difference between the total figure for the VAT charged by you and the total figure that you pay on your own purchases.
With the Flat Rate Scheme, you can instead pay a ‘flat rate’ of VAT to HMRC.
How does the VAT Flat Rate Scheme work?
On top of using a fixed VAT rate, the scheme has two other specific underlying factors.
The first is that you keep the difference between what’s charged to customers and what’s paid by you to HMRC. And the second is that you aren’t able to reclaim the VAT on any purchases you make. The only exception to this is if you buy particular capital assets costing over £2,000.
Who can join the Flat Rate Scheme, and how do I register?
Providing you’re already a VAT-registered business, and you have vatable turnover of £150,000 or less, you can join the scheme.
If you wanted to register for the scheme, then you would apply to HMRC either online or via post.
You would need to leave the scheme if your VAT taxable turnover exceeds £150,000. Additionally, there are some other reasons you wouldn’t be able to use flat rates:
- Your business is closely linked with another business (for example one is dominantly influenced by the other)
- You’ve also joined a margin or capital goods VAT scheme
- You use the Cash Accounting Scheme instead
- In the last 12 months you’ve:
- Left the scheme
- Committed a VAT offence, such as VAT evasion
- In the last 24 months you’ve:
- Either joined a VAT group or were eligible to do so
- Registered for VAT as a business division
What is the flat rate percentage?
The flat rate percentage is subject to a variety of factors.
For those that spend more on their goods, your percentage is determined by your business type. HMRC have created a list for each category and its corresponding VAT flat rate.
For example, if you are in the printing industry your flat rate percentage is 8.5% compared to 14.5% if you are and IT consultant.
It’s worth noting that if it’s your first year of being a VAT-registered business, you’ll receive a 1% discount for this period.
You may pay a different rate if the cost of your goods is only small. ‘Small’ is either less than 2% of your total turnover or £1,000 per year. You would then be classed as a ‘limited cost business’, which would mean you pay a higher rate of 16.5%.
How do I calculate my flat rate percentage?
The calculation for working out the VAT you’ll pay is easy – no VAT Flat Rate Scheme calculator required. You’ll need to know your VAT inclusive turnover and the appropriate flat rate percentage base on your industry.
You would use this simple sum to work out how to calculate VAT on the Flat Rate Scheme:
(VAT inclusive turnover) x (VAT flat rate) = amount due
So, for example, if your work is in the ‘printing’ category, and a customer pays £500, plus 20% VAT, totalling £600. The VAT due to be paid to HMRC would be £600 x 8.5% = £42.50
Advantages and disadvantages of the VAT Flat Rate Scheme
The simplicity of the calculations is the main advantage of the VAT Flat Rate Scheme, making reporting much easier and requiring less administration. This also means that it’s less time-consuming and managing cash flow is made easier.
Fixed rate percentages may in some circumstance mean paying less VAT to HMRC than under the traditional scheme, giving you a cash flow advantage. Careful calculations should be made first though before registering. And if at any point you feel the scheme’s not for you, then you can leave whenever you want to.
By using the scheme, you additionally wouldn’t be able to claim input tax or VAT on imports or acquisitions. You could end up paying more VAT with flat rates too because the percentages are averages. There’s also the chance of complications if you buy and sell goods from outside the UK.
The VAT Flat Rate Scheme clearly has its benefits and drawbacks. But, now you know them, how it works, your chances of eligibility and how to calculate it, you can make an informed decision about whether or not it’s for you.
If it is, then you can make VAT even easier with GoSimpleVAT. Whether you need to follow HMRC’s digital path for Making Tax Digital (MTD) for VAT or need some support with the sums, our software can help. Simply get in touch with our friendly team today.
Last updated on 13th December 2019.