VAT flat rate scheme

The VAT Flat Rate scheme provides smaller businesses with a number of options that can often create real cash savings. Benefits include:

  • Simplified administration, quicker to produce returns.
  • Depending on the market sector your business operates within, you may be able to reduce your overall VAT payments.

To qualify, your annual turnover must not exceed £150,000, excluding VAT. Once you are in the scheme you are not required to leave until your annual turnover exceeds £230,000.

If you register for this scheme you still add VAT to your sales in the usual way. Instead of calculating the amount you need to pay to HMRC as the difference between your output VAT (the VAT you add to your sales) and your input VAT (the VAT added to the goods or services you buy), you simply calculate the total of your sales including VAT and multiply this figure by the flat rate percentage. Income for these purposes, your flat rate turnover, includes:

  • VAT inclusive sales at standard rate, zero rate and reduced rate supplies.
  • Sales of exempt supplies such as rent or lottery commission.
  • Sales of capital expenditure goods – unless you have previously reclaimed VAT when the goods were purchased, in which case you have to pay VAT at the standard rate and not the flat rate.
  • Sales to other EU countries.
  • Sales of second hand goods. If you have a lot of turnover in this category you may be better off using a margin scheme.

Obviously, the higher the flat rate percentage, the less beneficial the scheme will be in reducing your overall VAT payments.

Flat rate percentages vary between 4% and 14.5%.

For example a business repairing personal or household goods would save £2,000 per year in the following scenario:

  1. Flat rate that applies 10%.
  2. Turnover £100,000.
  3. Turnover including VAT £120,000.
  4. Purchases of parts and services £30,000, VAT input tax added £6,000.
  5. Annual VAT bill without applying Flat Rate Scheme, £14,000 (£20,000 – £6,000).
  6. Annual VAT bill applying Flat Rate Scheme, £12,000 (£120,000 x 10%).

Additionally you can reclaim the input tax charged on capital assets bought where the total single invoice value (including VAT) is £2,000 or more.

As a bonus, in the year following the registration of your business for VAT, you can deduct 1% from the flat rate percentage. So in our example, if a full year’s discount was available, the savings in year one would actually be £3,200. (£14,000 less £120,000 x 9%).

(Please note: This 1% reduction in the flat rate would not apply to businesses who had been VAT registered for more than a year when they join the Flat Rate Scheme.)

The scheme does not suit businesses that have a high proportion of zero rated sales or that have high levels of input tax reclaimable on purchases of goods and services. And it may not be possible to produce real cash savings if your business falls into one of the higher flat rate percentages.

You have to make a formal application to join the scheme and it is well worth crunching the numbers to see if you would benefit. As always we would be happy to do this for you.

VAT flat rate and cash schemes

Two of the VAT special schemes can provide particular advantages for smaller businesses.

  • The Flat Rate Scheme (reviewed in our June 2012 newsletter) can reduce overall VAT payable, especially for traders that are subject to the lower Flat Rate percentages.
  • Cash Accounting allows you to defer payment of VAT added to your sales until the invoices are paid. This can have significant cash flow benefits for businesses with amounts owed from customers that are higher than amounts due to suppliers.

In order to register for either of these schemes, your projected business turnover for the year following registration needs to be below certain limits.

  • Under the Flat Rate Scheme rules you can register as long as your projected turnover for the next twelve months does not exceed £150,000 excluding VAT.
  • The equivalent turnover limit to join the Cash Accounting Scheme is £1.35m.

Once you are in the scheme you can continue to enjoy the benefits until your turnover exceeds the exit turnover limits. For both of these schemes these turnover limits are higher than the amounts required for registration.

  • You will need to leave the Flat Rate Scheme when your annual turnover exceeds £230,000 excluding VAT.
  • The equivalent amount to leave the Cash Accounting scheme is £1.6m.

Planning note

From a planning point of view it is therefore wise to consider registration for these schemes when a smaller business commences trading or shortly thereafter, when turnover limits will be at their lowest levels in most cases.

The Flat Rate rules allow you to stay in the scheme and exceed the turnover registration limits by £80,000 before you need to exit.