What is the VAT Flat Rate Scheme?

UPDATE:

Since writing this blog, HMRC have introduced the 'limited cost business rules' which will put off most businesses. You’re classed as a ‘limited cost business’ if your goods cost less than either 2% of your turnover or £1,000 a year (if your costs are more than 2%). This means you pay a higher rate of 16.5%. You can calculate if you need to pay the higher rate and work out which goods count as costs.

ORIGINAL POST:

Usually, the amount payable to HMRC is the VAT on your sales minus the VAT on your purchases.

With the Flat Rate Scheme, you pay a fixed rate (dependent on your business activity) on your gross sales.

For Example

Say I was a management consultant (currently a fixed rate of 14%) and I made sales in one 3 month period of £10,000 + VAT = £12,000.

I would pay 14% on the gross sales figure of £12,000 to HMRC = £1,680 instead of the £2,000 I would have had to pay on the normal scheme.

The drawback is that you cannot claim VAT on your expenses (except for certain capital assets over £2,000, such as an expensive computer) – but how much in VATable expenses would a consultant have? A mobile phone and a bit of computer equipment perhaps………I wouldn’t have thought it added up to £2,000 - £1,680 = £320 per quarter in VAT.

Flat Rate Scheme Advantages

It’s much simpler to calculate a fixed percentage on your sales than to account for VAT on every sale and purchase.

You’ll receive a 1% reduction in your rate in your first year as a VAT registered business.

More often than not a business saves money on the scheme – which is always good!

Other Points

Find the rates for different business activities here: www.gov.uk/vat-flat-rate-scheme/vat-flat-rates

To join the Flat Rate Scheme your turnover must be less than £150,000 (excluding VAT) and you must leave the scheme if your turnover exceeds £230,000 (including VAT).