Call now on 0161 976 5996 0161 976 5996

We even invest our own money to ensure our business clients get full access to one of the world’s leading marketing and business growth systems

VAT 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.

However, some business will pay less VAT by using the scheme and some may pay more by using it as the percentages used are based on the average VAT payable by particular trade sectors. It is important to calculate the financial effect before applying to use the scheme.

The Flat Rate Scheme Calculation

These are the steps in the calculation...

So if for example your gross turnover comes to £20,000 and the percentage for the sector is 10%, the VAT due is £2,000. If what you purchased was a capital asset for £3,833 including £500 of VAT, then the VAT payment due would be £1,500.

To qualify to join the scheme...

A business must apply to join the flat rate VAT scheme and can leave whenever it chooses by informing HMRC in writing.

From April 2017, the government will introduce a new 16.5% rate for businesses with limited costs, such as many labour-only businesses. This will help level the playing field, while maintaining the accounting simplification for the small businesses that use the scheme as intended

The Business Sector Flat Rates

Different business sectors must use their own flat rate.

A business must choose its sector on the grounds that it most closely describes its main trading activities. If the trading mix changes, so say the majority of the turnover comes from supplying restaurant meals rather than alcoholic drinks the trade sector to be used will change from 'Pubs' (6.5%) to 'Catering Services' (12.5%). The change in sector should be made from the start of the VAT period that contains the anniversary of joining the scheme.

It is advisable to set out in writing why you made the selection of trade sector.

1% Reduction in First Year of VAT Registration

In your first year of VAT registration there is a 1% reduction in the flat rate that is applied to your turnover. The reduction is for the 12 months following the date of VAT registration and not the date of joining the flat rate scheme. There is no entitlement to the 1% reduction if you register for VAT 12 months after you were required to register.

A Trap in the Flat Rate Scheme

The flat rate must be applied to all business income, including rents and sales of assets where VAT was not reclaimed, such as cars or property, but not interest received from business bank accounts. This means you effectively pay VAT on the gross receipts of sales on which you have not collected any VAT.

If you are a sole-trader the flat rate should be applied to any letting income you receive in your sole name, as lettings are regarded as a business for VAT purposes. Lettings undertaken as a partnership, perhaps jointly with your spouse, are not counted as part of your sole-trader business income. When you sell a let property the flat rate should be applied to the total proceeds. You can withdraw from the flat rate scheme before you sell a high value item such as a property, but you have to stay out of the scheme for at least 12 months.

How We Can Help You

We can advise you on the suitability of the flat rate scheme for your business, applying to join the scheme and assistance with completion of your VAT returns.