VAT Flat Rate Scheme – A Quick review

The VAT Flat Rate Scheme is designed by HMRC to help and simplify the VAT Return process for small businesses. The scheme is aimed to ensure that businesses pay roughly the same amount of VAT without having to complete as much paperwork as other VAT schemes.

Using the VAT Flat Rate scheme, businesses pay VAT as a fixed percentage of their VAT inclusive turnover. The actual percentage used depends on the type of business. The scheme has been designed to simplify the way a business accounts for VAT and in so doing reduce the administration costs of complying with the VAT legislation.

The scheme is open to businesses that expect their annual taxable turnover in the next 12 months to be no more than £150,000, excluding VAT. The annual taxable turnover limit is the total of business sales during the year. It includes standard, reduced rate or zero rate sales and other supplies. It excludes the actual VAT charged, VAT exempt sales and sales of any capital assets.

Have a look at our VAT Services page for details.

Who can’t join the scheme?

You cannot join the Flat Rate Scheme if:

• you have previously been registered and only came out of the scheme in the last 12 months;
• you are, or were, within the previous 24 months, registered for VAT as the division of a larger business, or as part of a group, or you were eligible to do so;
• you use one of the margin schemes for second-hand goods, art, antiques and collectibles, the Tour Operators’ Margin Scheme, or the Capital Goods Scheme;
• you have been convicted of a VAT offence or charged a penalty for VAT evasion in the last year; or
• your business is closely ‘associated’ with another business.

As part of an annual review, it may be advisable to check that clients using the scheme continue to qualify. Businesses that have joined the scheme can continue using the scheme provided their total business income does not exceed £230,000 in a 12 month period. There are also special rules where increased turnover is temporary.

A limited cost trader test was introduced in April 2017. Businesses that meet the definition of a ‘limited cost trader’ are required to use a fixed rate of 16.5%. The highest ‘regular’ rate is 14.5%. If your clients meet the definition of a limited cost trader then it would be worth investigating if it would be more beneficial for them to leave the scheme and account for VAT using standard VAT accounting.

The scheme is unlikely to be beneficial for your business if you:

• Spend more on standard-rated business expenses than HMRC consider typical for your business sector;
• Regularly receive a VAT repayment under standard VAT accounting; or
• Make a lot of zero-rated or exempt sales.

Please contact us if you would like to discuss your options.