Table of contents
Table of contents
The VAT Flat Rate Scheme was introduced in the hope of simplifying VAT for business owners. 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.
Businesses on the Flat Rate Scheme still need to charge VAT on their sales as normal.
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.
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.
Limited cost traders using the VAT Flat Rate Scheme will pay a slightly higher flat rate of 16.5%.
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.
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:
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).
Your business will qualify for the VAT Flat Rate Scheme as long as:
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.
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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