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VAT Schemes: Is the Flat Rate Scheme Right for You?

VAT

VAT Schemes: Is the Flat Rate Scheme Right for You?

What is the flat rate scheme?

The flat rate scheme means that you pay a fixed percentage of your sales VAT to HMRC, but you cannot reclaim any purchases except assets over £2,000. You will then keep the remaining percentage of the VAT you have charged. The percentage you pay depends on your business type and if your business is considered a limited cost business.

If you’re in the first year as VAT-registered business, you will be entitled to a 1% discount from the date your business was registered for 1 year.

What’s a limited cost business?

You’re considered a limited cost business if your costs are less than:

  • 2% of your turnover
  • £1,000 a year (if your costs are more than 2%)

Your costs are moveable items or materials. This doesn’t include:

  • any services – which is anything that isn’t goods.
  • expenses like travel and accommodation
  • food and drink eaten by yourself or your staff.
  • vehicle costs including fuel unless you’re in the transport business using your own, or a leased vehicle.
  • rent, internet, phone bills and accountancy fees
  • gifts, promotional items, and donations
  • goods you will resell or hire out unless this is your main business activity
  • training and memberships
  • capital items for example office equipment, laptops, mobile phones and tablets

If your business falls under this category, then you pay a higher rate of 16.5%.

What percentage is relevant to my business?

The percentage varies depending on what type of business you have. You can check this using HMRC’s guidelines on the following link – https://www.gov.uk/vat-flat-rate-scheme/how-much-you-pay

How to calculate the flat rate percentage

You calculate the flat rate by multiplying your gross sales by your flat rate percentage. For example:

Gross sales = £1,000

Flat rate percentage = 9.5%

Your flat rate payment = £95

Eligibility

To join the scheme your VAT turnover must be £150,000 or less (excluding VAT). However, you will not be able to join the scheme if:

  • you left the scheme in the last 12 months.
  • you committed a VAT offence in the last 12 months, for example VAT evasion.
  • you joined (or were eligible to join) a VAT group in the last 24 months.
  • you registered for VAT as a business division in the last 24 months.
  • your business is closely associated with another business.
  • you’ve joined a margin or capital goods VAT scheme.
  • You are using the Cash Accounting scheme.

How to apply

To join you will need to fill out the VAT600FRS form – https://www.gov.uk/government/publications/vat-application-to-join-the-flat-rate-scheme-vat600frs

You can then send the form through the post or email it to – frsapplications.vrs@hmrc.gov.uk

If you would like help with this, please get in touch.

Leaving the scheme

You must leave the scheme if:

  • you’re no longer eligible to be in it.
  • on the anniversary of joining, your turnover in the last 12 months was more than £230,000 (including VAT) – or you expect it to be in the next 12 months.
  • you expect your total income in the next 30 days alone to be more than £230,000 (including VAT)
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