VAT Flat Rate Scheme - Would the VAT Flat Rate Scheme work for your business?

27 Jul 2022

The VAT Flat Rate Scheme for Small Businesses is a simplified scheme which enables VAT registered traders to work out their VAT as a fixed percentage of their VAT-inclusive turnover. While the scheme will save work, it will not always be beneficial.

This note explains who can use the scheme, and the advantages and disadvantages of using it.

Are you eligible to join?

You can join the VAT Flat Rate Scheme if you are a VAT-registered business and you expect your VAT taxable turnover (excluding VAT) to be £150,000 or less in the next 12 months. Your VAT taxable turnover is your total turnover excluding sales that are exempt from VAT.

Once in the scheme, you can remain in it unless your turnover including VAT was more than £230,000 in the last 12 months, or your expect it to be in the next 30 days alone.

Once you have left the scheme, you cannot re-join for 12 months.

Nature of the scheme

Under the scheme, the VAT that you need to pay over to HMRC is calculated as a flat rate of your gross turnover, rather than as the difference between your output and input VAT. The percentage depends on your business sector, and also whether you fall within the definition of a limited cost business.

You cannot reclaim VAT on your purchases – an allowance is given in the flat rate percentage for input VAT. An exception is made for certain capital assets over £2,000.

Advantages

Using the VAT flat rate scheme will save you work, and it may also save you money (but this will depend on the nature of your purchases and sales).

You do not need to keep detailed records of VAT on sales and purchases. However, you will still need to issue VAT invoices.

The simplified nature of the scheme also reduces the amount of information that you need to provide on your VAT return, making it quicker and easier to complete.

Disadvantages

Under the scheme, there are special rules for business known as 'limited cost businesses'. You will be a limited cost business if the amount that you spend on 'relevant goods' is either less than 2% of your VAT flat rate turnover, or more than 2% of your VAT flat rate turnover, but less than £1,000 a year (£250 per quarter). Relevant goods are goods that are used exclusively for the purposes of the business, but exclude certain common costs, such as vehicle costs (unless you operate in the transport sector, capital goods and promotional items. Services are also excluded from the calculation.

The flat rate percentage for a limited cost trader is 16.5% of VAT-inclusive turnover. This is equivalent to 19.8% of net turnover, meaning that you will pay nearly all the VAT that you charge over the HMRC, leaving only a small margin for recovering any input VAT. Consequently, if you are a limited cost trader, you may pay more VAT to HMRC than if you use the traditional method.

If you usually receive a VAT repayment (which may be the case if you sell zero-rated goods), the scheme will not be for you.

We can help

We can help you work out whether, given the nature of your business, it is worth joining the scheme, or, if you are already using it, whether it is beneficial to remain in the scheme.