The Flat Rate VAT Scheme is a way of paying VAT that you may not have heard of, but may be more suitable to your business requirements concerning your VAT Returns. The scheme is designed to help simplify the VAT Return process for small businesses.
What is the Flat Rate VAT Scheme?
Ordinarily, the amount of VAT that a business is required to pay or claim back from HMRC is usually the difference between the VAT charged on the sales the business makes to customers, and the VAT the business pays on their own purchases.
If you use the Flat Rate Scheme however, you charge VAT to your customers and pay VAT to your suppliers in the same way, but the difference comes when preparing your VAT Returns. Instead of adding up all of the VAT you have charged in a period, and taking away all of the VAT you are able to reclaim, you simply add up all of your sales (including the VAT you would normally charge to customer) and pay a percentage of those sales to HMRC. With the Flat Rate Scheme, you cannot reclaim the VAT on your purchases, as the fixed percentage you apply balances out the different between the VAT you charge and the VAT you reclaim – except for certain capital asset purchases over the value of £2,000.
The percentage that you apply depends on the trade that your business is involved in, unless you are a ‘limited cost trader’ – read on for more details on what would apply to you.
Am I eligible to use the Flat Rate VAT Scheme?
You can join the scheme if:
- You are a VAT-registered business
- You expect your VAT taxable turnover to be £150,000 or less within the next 12 months. This figure is excluding any VAT you charge. See here to help you understand how to calculate your VAT taxable turnover.
There are some exceptions to your eligibility for the scheme if any of the following apply:
- You left the scheme within the last 12 months
- You have committed a VAT offence in the last 12 months – eg. a VAT evasion
- Your business is closely associated with another business – see here for details on what this involves
- You joined (or we eligible to join) a VAT group in the last 24 months
As mentioned above, the Flat Rate VAT Scheme is intended to simplify the VAT Return process for small businesses, and there may be a time where you must leave the scheme as you are no longer eligible:
- You no longer meet the eligibility criteria or your circumstances now fall within one of the exceptions listed above.
- On the anniversary of joining the scheme, your turnover for the previous 12 months exceeded £230,000 including VAT, or you expect it to be in the next 12 months.
What is my Flat Rate VAT percentage?
As mentioned earlier, the percentage you apply to your VAT taxable turnover depends upon the type of business you operate. There is some difference is you are classed as a ‘limited cost trader’, so let’s deal with that first.
You are classed as a ‘limited cost trader’ if you spend a small amount on goods for your business. The two factors to consider to judge if this applies to your business are if your goods cost less than either:
- 2% of your turnover
- £1,000 per year (if your costs are more than 2%) – this is apportioned based on how frequently you prepare your VAT Returns. If you prepare on a quarterly basis, your costs must cost less than £250 if they are more than 2%
If this does apply to your business, you pay a higher rate of 16.5% regardless of your business type. You can calculate using a GOV.UK service online, where there is also some guidance to aid you in working out which goods are counted as costs for this purpose. If you are not a ‘limited cost trader’ you must use your business type to find out your Flat Rate percentage.
In some instances for businesses, you may be on the line of the 2% threshold, and so in cases like this it would be required to complete this ‘test’ each time a VAT Return is prepared. This is because you are able to move between the ‘limited cost trader’ rate of 16.5% for one return, to the relevant rate for their industry for another return.
If a business does fall under the definition of a ‘limited cost trader’ you could be in a position where you are actually paying more VAT than you would on a standard VAT scheme, so it would be advisable to seek advice from a professional to ensure the scheme is right for you.
So, in the event a business must use the percentage per their industry. HMRC has a list of set percentages which you can check out here to see what rate would apply to your business.
Here are some examples, to help you understand how to establish which percentage must be used. We’ll work on the basis that the VAT Returns are prepared on a quarterly basis.
A business has a flat rate turnover of £15,000 and spends £400 on goods.
This is more than 2% of the flat rate turnover, and more than the £250 apportioned threshold, so the rate applied here is the industry rate of the business.
A business has a flat rate turnover of £30,000 a quarter. It spends £650 on relevant goods.
This is more than £250 but less than 2% of the flat rate turnover so the rate applied here is the ‘limited cost trader’ rate of 16.5%.
If you feel that the Flat Rate VAT Scheme is something you would want to explore as a good fit for your business, or have some concerns regarding the percentage rate you have to use, our team of VAT experts at CMA Accountancy are always here to help!