What is the Flat Rate Scheme for VAT?
Using standard VAT accounting, your VAT liability is the difference between the VAT you charge your customers and the VAT you incur on your purchases.
Using the Flat Rate Scheme you pay VAT as a fixed percentage of your VAT inclusive (or gross) turnover. The actual percentage you use depends on your type of business.
Who can join the Flat Rate Scheme?
You can join the Flat Rate Scheme for VAT if your estimated VAT taxable turnover - excluding VAT - in the next year will be £150,000 or less.
Who can't join the Flat Rate Scheme?
There are a few criteria that prevent a business from joining the Flat Rate Scheme, but the most common reason is because the business operates a margin scheme (such as for second-hand goods).
So provided there isn’t anything too unusual about your business and your turnover is below the threshold, you should be able to apply for the Flat Rate Scheme.
Benefits of using the Flat Rate Scheme
- You don't have to record the VAT that you incur on every purchase, as you do with standard VAT accounting. This can mean you spend less time on the books and deciding what you can and can’t recover the VAT on
- A first year discount. If you are in your first year of VAT registration you get a one per cent reduction in your flat rate percentage until the day before the first anniversary you became VAT registered
- Peace of mind. With less chance of mistakes, you have fewer worries about getting your VAT right
- Certainty. You always know what percentage of your takings you will have to pay to HMRC
The Big Winners of the Flat Rate Scheme
If your business predominantly sells to other VAT-registered businesses and the amount of VAT you recover on your purchases is fairly low, the Flat Rate Scheme could not only reduce your bookkeeping burden but it could benefit you financially.
The Flat Rate Scheme can often work well for contractors, consultants or couriers.
Potential disadvantages of using a Flat Rate Scheme
The VAT Flat Rate Scheme might not be right for your business if:
- You buy mostly standard-rated items, as you cannot generally reclaim any VAT on your purchases
- You regularly receive a VAT repayment under standard VAT accounting
- You make a lot of zero-rated or exempt sales
Invoicing and expenses
Although you only have to pay HM Revenue & Customs (HMRC), a percentage of your turnover, you must still show the VAT applicable as normal on your sales invoices.
But you cannot normally claim back the VAT you spend on any of your expenditure. This means you can simply record all of your expenditure gross and do not need to separately account for the VAT element.
However, subject to a number of conditions, you may be able to claim back the VAT on certain capital asset purchases with a VAT-inclusive price of £2,000 or more.
We can help
If you would like to concentrate on running the business, we can assist with all aspects relating to your VAT registration. We can advise you when you are obliged to register and also, when it may be beneficial to register.
We can help you manage your VAT, advising you on what you must show on the VAT invoices you issue to your customers, what expenditure you can and cannot recover the VAT on and preparing or reviewing your VAT returns. We can also review the various VAT schemes available to you, to assess if they would reduce or defer your VAT payments for you.
We also have a range of bookkeeping solutions that we can recommend to you based on your needs.
Contact us today to find out more about our bookkeeping and VAT services for small business owners and how they can benefit you on 0800 0523 555
By Jo Nockels
Last updated July 2014
Disclaimer: The information provided is based on current guidance (at date of publication) from HMRC and may be subject to change. Any advice shared here is intended to inform rather than advise. Taxpayer's circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this information, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.