What is the Flat Rate Scheme for VAT?

Whether you need to register for VAT because your turnover has reached the VAT registration threshold, or because you voluntarily want to register, deciding the best VAT scheme for your business should also be considered.

One of the options available to you (if your turnover, net of VAT, is below £150,000 in a 12-month period) is the Flat Rate Scheme.

The Flat Rate Scheme operates a fixed percentage rate of your turnover as the VAT payable to HMRC. The percentage is based on your trading activities and the rate is set by HMRC.

In deciding the rate to use, a business should review the types of trading activities supplied by HMRC and find the one that fits best. It is a matter of judgement at times.

There are some advantages and disadvantages of the Flat Rate Scheme that should be considered before deciding if this is the right scheme for your business.

Advantages

• It is simple to operate.
• You may have less of an admin burden in administering the VAT.
• You may pay less VAT than you collect.
• Some businesses make a profit through the Flat Rate Scheme.
• A new business can benefit from a 1% discount in its first year of trading.

Disadvantages

• You cannot claim back VAT on your expenses and purchases, except for certain capital items in excess of £2,000.
• The fixed rate set by HMRC may not be relevant to your business and therefore may not truly reflect your business and expenditure incurred. The rate set by HMRC is an estimate based on the industry norm and not always relevant to your business.
• Once your business reaches the turnover threshold limit, you can no longer use the Flat Rate Scheme and this may have an immediate impact on your cash flow.
• You have to pay VAT on all your sales and this will include sales that may be zero rated, exempt or at a reduced rate.

It is important to note that the Flat Rate Scheme does not suit all businesses and therefore you should not assume this is the right scheme for you.

If your business falls under the definition of a limited cost trader, your flat rate percentage is 16.5%. You are considered a limited cost trader if your expenditure on relevant goods is either less than 2% of your turnover, or less than £1,000 a year.

Please always seek professional advice before taking any action. We are happy to answer questions in future issues. Please send your questions through the Contact Us page on our website.