VAT Flat Rate Scheme

The amount of VAT a business pays or claims back from HM Revenue and Customs (HMRC) is usually the difference between the VAT charged by the business to customers and the VAT the business pays on their own purchases.

So with the Flat Rate Scheme:

  • You pay afixed rate of VAT to the HMRC
  • You keep the difference between what you charge your customers and pay toHMRC
  • You can’t reclaim theVAT on your purchases - except for certain capital assets over £2,000 

Single purchase examples include:

  • A computer package
  • Printer
  • Camera
  • Scanner
  • Speakers

If bought as one package is one purchase of capital expenditure goods.

Items of kitchen equipment bought for a restaurant:

  • Pizza oven
  • Fridge
  • Dishwasher

If all the items are from one supplier at one time, then they count as one purchase of capital expenditure goods. If they are from three different suppliers or at three different times then they will be three purchases and each must be £2,000 or more (Inc. VAT) to qualify for a reclaim of VAT

 

To join the scheme your VAT turnover must be £150,000 or less (excluding VAT), and you must apply to HMRC.

Joining or leaving the scheme

 

Joining the scheme

  • Online - when you register forVAT
  • By post - fill in VAT600 FRS and send it to the address on the form (or use VAT600AA/FRS to apply for the Annual Accounting Schemeat the same time)

Confirmation will be sent from the HMRC you’ve joined the scheme through your VAT online account (or in the post if you don’t apply online).

How to leave

You can choose to leave the scheme at any time. You must leave if you’re no longer eligible to be in it.

To leave, write to HMRC and they will confirm your leaving date.

There is a 12-month cooling off period before you can re-join the scheme.

Eligibility

You can join the Flat Rate Scheme if:

  • You’re aVAT-registered business
  • You expect yourVAT taxable turnover to be £150,000 or less (excluding VAT) in the next 12 months
  • VAT taxable turnover is the total of everything sold that isn’tVAT exempt.

Exceptions

You can’t use the scheme if:

  • You left the scheme in the last 12 months
  • You committed avat offence in the last 12 months, e.g. vat evasion
  • You joined (or were eligible to join) avat group in the last 24 months
  • You registered forvat as a business division in the last 24 months
  • Your business is closely associated with another business
  • You’ve joined a margin or capital goodsvat scheme

You can’t use the scheme with the Cash Accounting Scheme. Instead, the Flat Rate Scheme has its own cash based method for calculating the turnover.

Leaving the scheme

You must leave the scheme if:

  • You’re no longer eligible to be in it
  • On the anniversary of joining, your turnover in the last 12 months was more than £230,000 (includingVAT) - or you expect it to be in the next 12 months
  • You expect your total income in the next 30 days alone to be more than £230,000 (includingVAT)

Working out your flat rate

The VAT flat rate you use usually depends on your type of business. You may pay a different rate if you only spend a small amount on goods.

You get a 1% discount if you’re in your first year as a VAT-registered business.

If you spend a small amount on goods you are classed as a ‘limited cost business’ if your goods cost less than either:

  • 2% of your turnover
  • £1,000 a year (if your costs are more than 2%)

This means you pay a higher rate of 16.5%. You can make the calculation to see if you need to pay the higher rate. You can and work out which goods count as costs.

If you aren’t a limited cost business, you use your business type to work out your flat rate.

What you can expect to pay

You calculate the tax you pay by multiplying your VAT flat rate by your ‘VAT inclusive turnover’.

For example if you bill a customer for £1,000, adding VAT at 20% to make £1,200 in total.

You run a takeaway so the VAT flat rate for your business is 12.5%.

Your flat rate payment will be 12.5% of £1,200, or £150.

VAT inclusive turnover is different from standard VAT turnover. As well as business income (such as from sales), it includes the VAT paid on that income.

A list of flat rates for different types of business can be found on the HMRC website