What Is Flat Rate VAT And Can It Benefit My Company?
Value Added Tax (VAT) is charged by certain businesses on taxable supplies - such as goods and services.
Businesses who are VAT registered on the standard scheme must account for VAT on the full value of their sales and they are also able to reclaim VAT on purchases. Figures for VAT charged and paid must be reported to HMRC through a VAT return (usually every three months).
If more VAT has been charged by a business than has been paid, the difference must be paid to HMRC. On the flip-side of that, if more VAT has been paid than charged, the difference can be reclaimed from HMRC. However, the Flat Rate Scheme works differently from this.
So, what is the Flat Rate Scheme?
The concept is the same as far as the amount of VAT charged and paid by the business is concerned. However, there are different rules for businesses registered on the Flat Rate Scheme, registered businesses:
- pay a flat / fixed rate of VAT to HMRC.
- retain the difference between VAT charged and VAT paid to HMRC.
- cannot reclaim VAT which they have paid (unless they have certain capital assets in excess of £2,000)
Which businesses can join the Flat Rate Scheme?
Businesses with a VAT taxable turnover which exceeds £85,000 are obliged to register for the standard VAT scheme (although anyone can voluntarily register for it if they are under the threshold).
For the Flat Rate Scheme, the threshold is a taxable turnover of £150,000 and works differently from the standard scheme. Businesses can opt to join the scheme as long as their taxable turnover is below the threshold over the next 12 months. If their taxable turnover exceeds the threshold since joining the scheme, they may be required to leave the scheme.
Leaving the scheme
Businesses are obliged to leave the scheme if:
- They are no longer eligible to be in the scheme
- On the anniversary of joining, if their turnover in the last 12 months exceeded £230,000 (including VAT)
- They expect their turnover to exceed £230,000 in the next 12 months
- They expect their income in the next 30 days alone to exceed £230,000
Which businesses cannot join the Flat Rate Scheme?
Businesses are not eligible to join the Flat Rate Scheme if:
- They left the scheme within the previous 12 months
- They committed a VAT offence in the previous 12 months
- They joined a VAT group in the previous 24 months
- They registered for VAT as a business division in the previous 24 months
- Their business is closely associated with another business
- They have joined a marginal or capital goods VAT scheme.
Also, any business that is registered for the Cash Accounting Scheme is ineligible to apply.
Is the Flat Rate Scheme completely optional?
Businesses aren’t required to join the Flat Rate Scheme.
Although businesses must become VAT registered once they hit the £85,000 turnover threshold. Some businesses will benefit from the flat rate scheme more than others.
How does a business calculate its flat rate?
There is a different flat rate for each type of business (for example, 14.5% for Accountancy and Bookkeeping and 12% for Laundry and dry-cleaning services). For a full list of rates according to business type, go to the Gov.uk website.
There is a 1% discount on these fixed rates for businesses who are in their first year as a VAT registered business.
Limited cost businesses
A business is classed as “limited cost business” if it spends:
- less than 2% of their annual turnover on goods; or
- less than £1,000, if its total spend on goods is more than 2%
Limited cost businesses are required to pay a higher flat rate of 16.5%.
VAT inclusive turnover
The tax paid is calculated by multiplying the relevant flat rate percentage by the VAT inclusive turnover.
For example, if an accountant charged clients £2,400 to their clients (£2,000 +VAT at 20%). They then multiply this £2,400 by the flat rate (14.5%), so the amount payable to HMRC would be £348.
In this case, the difference (£52) can be kept by the accountant as part of the flat rate scheme.
What are the Pros and Cons of the Flat Rate Scheme?
- It’s no more complicated than filling in a standard rate VAT return.
- New businesses can benefit from the 1% discount in their first year of trading.
- Depending on the circumstances, it can save businesses money.
- VAT cannot be reclaimed on purchases (unless they are capital purchases)
- Exempt income is taxed on the flat rate.
- Identifying the flat rate for the business can be challenging.
Opting in and out of the VAT Flat Rate Scheme
Businesses can join the Flat Rate Scheme when they register for VAT. Alternatively, they need to complete form VAT600FRS. Once this is completed it can either be emailed or sent to the address on the form.
When a business wants to leave the scheme (or is required to) they must write to HMRC.
All figures quoted are correct at the time of publication. The flat rate scheme may or may not be suitable for your business. This article is for guidance only, and professional advice should be sought before making any decisions.
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