VAT flat rate scheme – is it worth it?
The VAT flat rate scheme is a simplified scheme for smaller VAT-registered businesses. While using the scheme will save work, this may come at a cost if the amount of VAT paid to HMRC under the scheme is more than would be payable if traditional VAT accounting is used. This will depend on the actual VAT charged and incurred, the flat rate percentage for the trader’s business sector and whether the trader is a limited cost trader.
Eligible traders
A trader can use the flat rate scheme if they are registered for VAT or eligible to be registered and their annual turnover excluding VAT is not more than £150,000. Once within the scheme, a trader can remain in it as long as their annual turnover does not exceed £230,000. However, if turnover exceeds this limit temporarily, HMRC may allow the trader to remain in the scheme if they are satisfied that the trader’s turnover in the next 12 months will not exceed £191,500.
Traders using another VAT scheme cannot join the flat rate scheme. If a trader leaves the scheme, they cannot rejoin until 12 months have elapsed.
Nature of the scheme
Under the scheme, the trader pays a fixed percentage of their VAT-inclusive turnover over to HMRC rather than the difference between the VAT that they charge on sales and that incurred on expenses. This reduces the amount of record-keeping needed, and simplifies the VAT return process.
The flat rate percentage depends on the business sector in which the business operates. The percentages can be found on the Gov.uk website at www.gov.uk/vat-flat-rate-scheme/how-much-you-pay.
Special rules apply to traders who meet the definition of a limited cost business. This is the case where goods cost less than 2% of turnover or less than £1,000 (where costs are more than 2% of turnover). Money spent on services is not taken into account in working out whether a business is a limited cost business. The calculation is performed for each VAT quarter, so a business may be a limited cost business in one quarter and not in another. Where a business is a limited cost business for a quarter, the VAT payable to HMRC is 16.5% of their VAT-inclusive turnover for that quarter, regardless of the sector they operate in and the flat rate percentage for that sector.
A business receives a 1% discount on their flat rate percentage for the first year of VAT registration .