Are you trying to work out if you should join the VAT Flat Rate Scheme? Here’s a quick overview of how flat rate VAT works.
What’s different about the VAT Flat Rate Scheme?
Rather than your VAT bill being the total amount you charge on sales, minus the total amount you pay on purchases over the same period of time, you’ll pay HMRC a percentage of all your sales.
The percentage you need to pay doesn’t affect the rate of VAT you must charge to your customers – this carries on as normal.
How much VAT will I pay on the Flat Rate Scheme?
You’ll pay a fixed rate of VAT as a percentage of your turnover, regardless of what your customers pay to you. The percentage you pay to HMRC is based on which industry you work in, such as agriculture or accountancy, and you’ll get a 1% discount for your first year as a VAT registered business.
It’s a bit different if you’re a limited cost trader though. Fret not, we’ll explain this next.
What is a limited cost business?
A limited cost business is one which only spends a small amount on goods; either less than £1,000 per year, or less than 2% of its turnover. Contractors who sell their personal services to customers will often be limited cost traders because they don’t have goods they can resell repeatedly.
Can I reclaim VAT on the Flat Rate Scheme?
Businesses on the Flat Rate Scheme can only claim back VAT on capital assets (such as equipment) over £2,000 or more. In most cases you won’t be able to claim anything back, but you can keep the difference between what you charge your customers and the flat rate you pay to HMRC.
For instance, a printing business pays a flat rate of 8.5% but charges customers 20% – the business can keep the difference.
Should I use the Flat Rate Scheme?
This depends on you and your business. Some people prefer the VAT Flat Rate Scheme because they find it simpler, whereas others would be more tax efficient on a different scheme. Have a look at:
- What your business buys and sells
- The flat rate which applies to your business
- Your typical turnover
This information will help you work out if VAT FRS is tax-efficient for you and your business. It’s also pretty handy to keep an eye on your financial data anyway, but obviously we’re going to say that because we make accounting software. (But it is very handy).
Is my business eligible for the VAT Flat Rate Scheme?
Your business will qualify for the VAT Flat Rate Scheme as long as:
- It’s VAT registered (here’s a link to an article which explains how to do that)
- You expect your VAT taxable turnover to be £150,000 or less (excluding VAT) in the next 12 months
If you join the scheme and your turnover increases, you won’t be able to continue using it if your total income for the year is more than £230,000.
Completing VAT returns
Regardless of which scheme you decide to use for your business, all VAT-registered businesses must keep digital records and submit returns using specialist software. If these words strike fear deep into your heart, we go into more detail about making VAT submissions in a different article.
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