What is the flat rate scheme?
The VAT flat rate scheme is designed to make it simpler and quicker for small businesses to complete their VAT return.
This is because VAT payable to HMRC is calculated as a particular percentage of the gross turnover of the business and not as the difference between VAT on individual sales and purchases. In particular there is no need to record the VAT incurred on most purchases and determine whether it is reclaimable or not, so there is less chance of error. The amount of VAT charged to customers remains the same whether using the flat rate scheme or not.
How will it help you?
The aim of the scheme is to simplify the way small businesses account for VAT so that you will spend less time and money keeping VAT records and calculating the VAT payable to HMRC.
Might you pay more VAT by using the flat rate scheme?
Some businesses will pay more and some will pay less VAT by using the scheme. This is because the flat rates are averages. You can estimate the effect on your business by using our calculator. Please click here for the calculator.
Who can join the scheme?
The scheme is open to small businesses whose annual taxable turnover (not including VAT) does not exceed £150,000.
Who cannot join the scheme?
There are some exclusions. You cannot use the scheme if you:
- already use any of the schemes for second-hand goods, tour operators or capital goods;
- have been guilty of a VAT offence or dishonesty in the last 12 months;
- have been ‘associated’ with another business or have registered as part of a VAT group or in VAT divisions in the last 24 months.
How does the scheme differ from normal VAT rules?
Under the normal VAT rules you have to identify the VAT on each sale you make, record the value and VAT separately and pay the VAT to us as output tax. Similarly you have to identify the VAT included in the things your business buys, record the value and the VAT separately and claim the VAT back from HMRC as input tax.
Under the flat rate scheme you do not have to identify, or separately record, the VAT on your sales and purchases to calculate the VAT you owe. You simply record all the sales your business makes, including exempt sales, and apply the appropriate flat rate percentage for your trade sector to the total in each period. The result is the VAT you owe to HMRC.
How are the flat rates calculated?
The flat rate percentages are calculated from the net tax paid by all the businesses that are currently registered for VAT and eligible for the scheme. The net tax paid varies with different trade sectors and so there are a variety of flat rate percentages. You can find the flat rate perentage for your business here. The net tax calculated using the flat rate percentage allows for the fact that businesses can usually recover the tax paid on their purchases. Under the flat rate scheme you normally cannot claim input tax with some exceptions.
How do you calculate my flat rate turnover?
To calculate your turnover, you record the sales you make either at the time you invoice your customers or at the time you receive payment.
How do you calculate the VAT due?
At the end of each VAT period, take the VAT inclusive turnover of your business and multiply this by the flat rate percentage for your trade sector. For example, if your business is the repair of motor vehicles and your VAT inclusive turnover for the VAT period is £20,000 the calculation is: £20,000 x 6.5% = £1,350. So your tax due is £1,350.
What is the 1% reduction for new VAT registrations?
Newly VAT registered businesses use the flat rate for their sector minus 1%. So, if the rate for your sector is 9%, you apply a flat rate of 8% in your first year of VAT registration.
How do you recover VAT?
If you use the scheme you do not make a separate claim for input tax (VAT on your purchases) or for VAT on imports or acquisitions. The flat rate percentage includes an allowance for these items. Two exceptions follow.
What if you buy an expensive capital asset?
If you buy a single capital asset with an invoice value, including VAT, of £2,000 or more you can claim the the VAT on your VAT return in the normal way.
If you do recover VAT on an expensive capital asset, any subsequent disposal of that asset has to be accounted for using the normal VAT accounting rules. Add the VAT calculated to your flat rate calculation of VAT due.
Should you issue VAT invoices?
If your customers are registered for VAT, follow the normal rules and issue a VAT invoice. The flat rate scheme affects the way you calculate the VAT you owe to us but does not change the VAT rate applicable to your sales. This means that when you issue a VAT invoice, you show VAT on it at the normal rate for that type of supply (not the flat rate percentage)
Who can join the scheme?
You can apply to use the scheme if there are reasonable grounds for believing that the following turnover test is met:
- Your taxable turnover (not including VAT) in the next year will be £150,000 or less.
How do I calculate my taxable turnover for the first turnover test to join the scheme?
The flat rate scheme is for small businesses. The first turnover test is the value of your taxable supplies (ie your sales) excluding VAT. For the first test, exclude any anticipated sales of capital assets but always include all of the following:
- the VAT exclusive value of standard rate, zero rate and reduced rate supplies (ie Sales);
- the VAT exclusive turnover from the sale of second hand goods sold outside the margin scheme; and
- any sales of investment gold that are covered by the VAT Act
How do I calculate my total income for the second turnover test to join the scheme?
The second turnover test is the value (excluding VAT) of all your business supplies (ie sales) except anticipated sales of capital assets. This includes, in addition to your taxable supplies (sales), both of the following:
- the value of any exempt supplies, such as rent or lottery commission; and
- any other income received or receivable by your business. This includes any non-business income such as that from charitable or educational activities.
Note: non-business income is included in the joining test because the scheme is for small businesses. When you use the scheme, non-business income is not included in the VAT inclusive turnover to which the flat rate applies.
How do I know what my future turnover is going to be?
You may forecast your future turnover in any reasonable way. If you have been registered for VAT for 12 months or more, the turnover declared on your returns may be a reasonable guide but take into account any proposed or expected changes. If you are not VAT registered when you apply for the scheme, you may forecast your turnover by looking at:
- any period of trading before you join the scheme or registered for VAT;
- the turnover of the previous business owner; or
- information on business plans or loan applications.
What if my future turnover rises over my forecast?
However you estimate your future turnover, HMRC will not penalise you provided there were reasonable grounds for what you forecast. It is sensible, therefore, to keep a record of what figures you used to calculate your future turnover. If your forecast of turnover had no reasonable basis, you may be excluded from the scheme immediately or even from the date your ineligible use began..
What if my turnover rises once I have joined the scheme?
You may stay in the scheme provided your total VAT inclusive turnover for the year just gone does not exceed £225,000. Make this check on each anniversary of your business joining the flat rate scheme. Additionally, you must leave the scheme if your income increases so that there are grounds for believing it will exceed £225,000 in the next 30 days alone.
How can I apply?
Call the National Advice Service on 0845 010 9000. They can take your application over the phone.
Please contact us to help you with your VAT needs.
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