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 The VAT flat rate scheme is designed to make it simpler and quicker for small businesses to complete their VAT return.
This is because VAT payable to HMRC is calculated as a particular percentage of the gross turnover of the business and not as the difference between VAT on individual sales and purchases. In particular there is no need to record the VAT incurred on most purchases and determine whether it is reclaimable or not, so there is less chance of error. The amount of VAT charged to customers remains the same whether using the flat rate scheme or not.
However, some business will pay less VAT by using the scheme and some may pay more by using it as the percentages used are based on the average VAT payable by particular trade sectors. It is important to calculate the financial effect before applying to use the scheme.
The Flat Rate Scheme Calculation
These are the steps in the calculation...
- The output VAT for a VAT return is established by multiplying the VAT-inclusive turnover by a fixed percentage which is determined by the sector in which the business operates. This goes in Box 1 on the return.
- All turnover is included in the taxable supplies it has made, whether standard, reduced, zero rated or even exempt and it is the gross turnover.This figure goes into Box 6.
- Usually no VAT can be reclaimed on purchases but there are exceptions for any VAT on purchases before the business was registered and VAT and on a single capital asset that costs over £2000 inclusive of VAT can be reclaimed. The VAT on these goes in Box 4 as usual and the net amount of the purchase in Box 7.
So if for example your gross turnover comes to £20,000 and the percentage for the sector is 10%, the VAT due is £2000. If you purchased a capital asset for £3,833 including £500 of VAT, then the VAT payment due would be £1500.
To qualify to join the scheme...
- A business must have a taxable turnover, excluding VAT, of no more than £150,000 a year. The taxable turnover is the total value of supplies or sales made by the business that are liable to a VAT whether at standard, reduced or zero rates, but excluding any expected sales of capital assets.
- A business must also have a total turnover, including VAT, of no more than £187,500 in a year. Exempt and non-business income is added in as well to arrive at this figure, but not sales of capital assets. However, this test is to be abolished from 1 April 2009.
- A business must not already use the second hand goods, the tour operators or retail schemes.
- The business must not be required to use the capital goods scheme for certain capital items.
- A business must not have been found guilty of a VAT offence in the past year or be associated with another business or registered as part of a VAT group in the past 2 years.
A business must apply to join the flat rate VAT scheme and can leave whenever it chooses by informing HMRC in writing.
The Business Sector Flat Rates
Different business sectors must use their own flat rate.
A business must choose its sector on the grounds that it most closely describes its main trading activities. If the trading mix changes, so say the majority of the turnover comes from supplying restaurant meals rather than alcoholic drinks the trade sector to be used will change from "Pubs" (5.5%) to "Catering Services" (12%). The change in sector should be made from the start of the VAT period that contains the anniversary of joining the scheme.
It is advisable to set out in writing why you made the selection of trade sector.
A lot of the rates changed following the reduction in the VAT rate to 15% in the 2008 pre-budget. A full list of business sectors and their rates is available in the HMRC guide to the VAT Rate change[pdf] - pages 43 and 44.
How We Can Help You
We can advise you on the suitability of the flat rate scheme for your business, applying to join the scheme and assistance with completion of your VAT returns.
Got a Question?
If you have any queries on any of the above, please ask a question
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