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Flat Rate VAT Scheme – an overview for small businesses

October 8, 2011

An alternative to the standard VAT scheme is the flat rate VAT scheme which offers qualifying businesses a simpler way of accounting for their VAT transactions.

Under the standard VAT scheme, you account for all the input and output VAT you receive from customers, or pay out to suppliers. Each quarter, you calculate how much VAT you must pay to HMRC (assuming you have received more VAT than you have paid out).

Under the flat rate VAT scheme, you apply a fixed percentage to your turnover each year, and pay this sum to HMRC, rather than calculating the input and output VAT on each transaction you make.

The flat rate percentage varies depending on the business sector or industry you are in. For example, accountants and IT contractors currently pay 14.5%, and a travel agent pays 10.5%.

Flat Rate VAT Scheme summary

  • You can join the scheme if your estimated turnover will be £150,000 or less over the next 12 months (excluding VAT)
  • Generally you cannot reclaim VAT on purchases under the scheme, as this has been factored into the fixed rate percentage for your industry, however you should be able to reclaim VAT on capital asset purchases of £2,000 or more
  • You can stay in the scheme until your total business turnover is greater than £230,000
  • When you charge clients or customers via your business, you do so at the standard 20% VAT rate
  • You still need to complete a quarterly VAT return to HMRC
  • Your business can leave the flat rate VAT scheme at any time
  • In your first year under the scheme, you can apply a 1% reduction to the standard flat rate for your industry as an extra incentive.

Benefits and drawbacks of the Flat Rate VAT Scheme

Clearly, from an accounting point of view, the flat rate scheme offers many advantages as you don’t need to record the VAT element of all your purchases and supplies.

If you make a large amount of purchases, then in many cases, you will be better off with the standard scheme. In many other cases, you will be better off under the flat rate scheme.

You should discuss the benefits of the flat rate scheme vs. the standard scheme with your accountant to see if which scheme would be the most cost effective for you to join.

Full details of the applicable rates, together with full guidance and application forms can be found on this page of the HMRC website.