Alongside the standard VAT rules, some small businesses may be better off by operating within the flat rate VAT scheme which has been running since 2002.
Please note that from 4th January 2011, new flat rate vat percentages apply, depending on your business type. See here for details.
The main aim of the flat rate scheme is to reduce the cost of complying with VAT obligations by simplifying the way small businesses calculate their VAT.
In essence, instead of paying Customs the total VAT charged on invoices minus any input VAT you may reclaim, you charge a fixed percentage of your gross turnover and pay that amount to Customs each year.
The fixed rate VAT percentage varies according to the type of business you run; a travel agency would pay 9%, whereas an accountant or IT consultancy would pay 13%.
Notes related to the Flat VAT Scheme
- Businesses in their first year of VAT registration can benefit from a 1 per cent reduction in the flat rate.
- You can apply if your annual taxable turnover (not including VAT) will be £150,000 or less; and your annual total turnover (including VAT) will be £187,500 or less
- If you buy a single capital asset with an invoice value, including VAT, of £2,000 or more you can claim the input tax on your VAT return in the normal way
- You continue to invoice clients at the normal 20% (from January 2011).
- You can voluntarily leave the flat rate scheme at any time
- Once you join the scheme you can stay in it until your total business income is more than £225,000.
Whether or not your business would be better off under the flat rate scheme depends very much on your own finances, and the business sector you are involved in. You should always consult an accountant who will be able to advise accordingly.
Full details of the applicable rates, together with full guidance and application forms can be found here.