Is the small business flat rate VAT scheme for you?

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Flat rate VAT. You’re intrigued already aren’t you?

OK, it may not set your world alight but bear with us. The reason we are telling you about it is because it might make your life easier. The scheme exists to make VAT accounting simpler for eligible businesses so a couple of minutes reading now may mean less headaches and admin in a few months’ time.

Could flat rate VAT apply to you?

So let’s cover the basics. You can join the flat rate scheme if you’re a VAT-registered business and you expect your VAT turnover to be less than £150,000 (excluding VAT) in the next 12 months. Once you’ve joined the scheme, your business can remain in it until turnover exceeds £230,000 (including VAT).

How does it work?

You make no changes to the way you invoice clients and customers. You continue to add standard VAT to all invoices. The flat rate calculations only apply to you. If you’re eligible, it lets you pay your VAT at a fixed percentage of your turnover rather than on a more admin heavy transaction by transaction basis.

The downside (you knew there’d be one). You can’t reclaim VAT paid on purchases as this is already factored into the percentage. Having said that, a one-off capital purchase of £2,000 (including VAT) or more is allowed, subject to some restrictions.

What rate will you pay?

The ‘flat rate’ ranges from 4% to 14.5% of your gross turnover depending on your business sector. (And in the first year of VAT registration, you get the added benefit of a 1% reduction off the rate.) You identify which trade classification fits best when you apply for the scheme. But do be careful when you’re selecting your flat rate category as you must be able to justify your reasons for selecting it over another similar category with a higher flat rate percentage.

If you have two different activities which fall into different classifications, you must use the flat rate that applies to the activities which form the larger part of your turnover. That could make the flat rate a brilliant business move – or a really poor choice.  

So is it for you?

Whether you’d be better or worse off depends to a great extent on the purchases your business makes. If you make a lot of purchases or VAT-exempt sales, you’re probably better off on the standard scheme.

The businesses likely to benefit most are those with small overheads or who buy few goods for resale or stock.  So you’ll need to do some calculations to see if it suits you. 

Peter Way-Rider, our Tax Manager, advises

“The flat rate VAT scheme is there to make VAT accounting simpler for eligible businesses. It is however important to ensure you select the correct category for your line of business and can justify the reasons behind your choice.”

Need some advice about whether flat rate VAT could help you?

Then get in touch with us. You can contact us on 01244 343504 or email