We’ve spent over two decades helping business owners understand key financial concepts, so we know how complex they can be. Even if you’ve got yourself set up with the top accounting software, areas like value-added tax (VAT) can still be a minefield.
The VAT Flat Rate Scheme was introduced to make things simpler for small business owners, but is it right for you? Our simple, easy-to-follow guide will break down what the scheme is, see if you’re eligible to take part, and explain how it can benefit your business.
💡Key takeaways
- The VAT Flat Rate Scheme makes bookkeeping easier by allowing you to pay a fixed percentage of your VAT-inclusive turnover to HMRC, rather than having to calculate VAT on each transaction.
- To be eligible, your business’s annual turnover must be £150,000 or less (excluding VAT), and you must leave the scheme if your annual turnover exceeds £230,000.
- You won’t be able to reclaim VAT on your business purchases, with the exception of single capital asset purchases costing over £2,000.
- Your flat rate percentage is determined by your business type, with ‘limited cost businesses’ subject to a much higher rate of 16.5%.
What is the VAT Flat Rate Scheme and how does it work?
For most new business owners, understanding VAT and how to pay it can be daunting. The VAT Flat Rate Scheme was introduced to make bookkeeping easier for small businesses in the UK, simplifying the way they record and make VAT payments.
Normally, you would need to calculate the amount of VAT per transaction: the amount you pay to (or claim back from) HMRC is the difference between the VAT you charge to your customers, and the VAT you pay on your own purchases.
However, with the VAT Flat Rate Scheme, your business pays a fixed amount of VAT. You’ll keep the difference between what you charge to your customers, and what you pay to HMRC.
Generally speaking, this means you’ll pay a lower percentage than the standard 20%. Just keep in mind, on the flat rate scheme: you can’t reclaim VAT on the purchases made by your business. Except for some specific capital assets over £2000.
Capital expenditure and VAT
Capital goods generally refer to anything bought for your business that’s a long-term physical asset: to create benefit for your business for longer than a year.
If you’re on the Flat Rate Scheme, you’re allowed to reclaim the VAT you’ve been charged on an individual purchase of capital goods: as long as the purchase amount, including VAT, comes to more than £2000.
These will be dealt with outside of your Flat Rate Scheme. You’ll need to claim the input tax in box four of your VAT return.
Your VAT Flat Rate Scheme percentage will depend upon the type of business you run. You can find a full list of business types and rates by jumping down to the section below.
To work out what you pay, you need to multiply your VAT flat rate by your ‘VAT inclusive turnover’. VAT inclusive turnover includes both your business’s income, as well the VAT paid on that income.
It might sound a little confusing at first, but let’s put this into a scenario to make it more digestible:
- Let’s say you run a hairdressers, and you charge a client £60 for a hair treatment. You add the standard 20% VAT, making it £72 in total.
- For hairdressing (or other beauty treatment services) the VAT flat rate is 13%. So that means the flat rate payment will be 13% of £72: £9.36.
So it’s your standard invoice amount, plus the standard VAT 20% rate x the flat rate for your business.
It’s also good to know that you’ll get a 1% discount if this is your first year as a VAT-registered business.
Your percentage rate will be entirely dependent on your type of business, you can find the full list of flat rate UK percentages in the table below:
| Business type | Rate |
|---|---|
| Accountancy or book-keeping | 14.5 |
| Advertising | 11 |
| Agricultural services | 11 |
| Any other activity not listed elsewhere | 12 |
| Architect, civil and structural engineer or surveyor | 14.5 |
| Boarding or care of animals | 12 |
| Business services not listed elsewhere | 12 |
| Catering services including restaurants and takeaways before 15 July 2020 | 12.5 |
| Catering services including restaurants and takeaways from 15 July 2020 to 30 September 2021 | 4.5 |
| Catering services including restaurants and takeaways from 1 October 2021 to 31 March 2022 | 8.5 |
| Catering services including restaurants and takeaways from 1 April 2022 | 12.5 |
| Computer and IT consultancy or data processing | 14.5 |
| Computer repair services | 10.5 |
| Entertainment or journalism | 12.5 |
| Estate agency or property management services | 12 |
| Farming or agriculture not listed elsewhere | 6.5 |
| Film, radio, television or video production | 13 |
| Financial services | 13.5 |
| Forestry or fishing | 10.5 |
| General building or construction services* | 9.5 |
| Hairdressing or other beauty treatment services | 13 |
| Hiring or renting goods | 9.5 |
| Hotel or accommodation before 15 July 2020 | 10.5 |
| Hotel or accommodation from 15 July 2020 to 30 September 2021 | 0 |
| Hotel or accommodation from 1 October 2021 to 31 March 2022 | 5.5 |
| Hotel or accommodation from 1 April 2022 | 10.5 |
| Investigation or security | 12 |
| Labour-only building or construction services* | 14.5 |
| Laundry or dry-cleaning services | 12 |
| Lawyer or legal services | 14.5 |
| Library, archive, museum or other cultural activity | 9.5 |
| Management consultancy | 14 |
| Manufacturing fabricated metal products | 10.5 |
| Manufacturing food | 9 |
| Manufacturing not listed elsewhere | 9.5 |
| Manufacturing yarn, textiles or clothing | 9 |
| Membership organisation | 8 |
| Mining or quarrying | 10 |
| Packaging | 9 |
| Photography | 11 |
| Post offices | 5 |
| Printing | 8.5 |
| Publishing | 11 |
| Pubs before 15 July 2020 | 6.5 |
| Pubs from 15 July 2020 to 30 September 2021 | 1 |
| Pubs from 1 October 2021 to 31 March 2022 | 4 |
| Pubs from 1 April 2022 | 6.5 |
| Real estate activity not listed elsewhere | 14 |
| Repairing personal or household goods | 10 |
| Repairing vehicles | 8.5 |
| Retailing food, confectionery, tobacco, newspapers or children’s clothing | 4 |
| Retailing pharmaceuticals, medical goods, cosmetics or toiletries | 8 |
| Retailing not listed elsewhere | 7.5 |
| Retailing vehicles or fuel | 6.5 |
| Secretarial services | 13 |
| Social work | 11 |
| Sport or recreation | 8.5 |
| Transport or storage, including couriers, freight, removals and taxis | 10 |
| Travel agency | 10.5 |
| Veterinary medicine | 11 |
| Wholesaling agricultural products | 8 |
| Wholesaling food | 7.5 |
| Wholesaling not listed elsewhere | 8.5 |
It’s also crucial to keep in mind that if your good costs less than 2% of your total turnover, or £1000 if it’s more than 2%, then you’ll be classified as a ‘limited costs business’. This means you’ll be subject to a far higher 16.5% rate, so it’s important to determine if this applies to your business before applying to the scheme.
Am I eligible for the VAT Flat Rate Scheme?
The key criteria for eligibility is the VAT Flat Rate Scheme threshold: if your annual turnover (before VAT) is up to, but no more than, £150,000 per year.
However, there are some other important exceptions that might exclude you from the scheme that you need to be aware of:
- If you’ve left the scheme within the last 12 months, you can’t rejoin.
- If you’ve committed any VAT offences within the last 12 months.
- If you’ve joined, or if you had eligibility for joining, within the last 24 months.
- You’ve already joined a margin or capital goods VAT scheme.
You also can’t join the VAT Flat Rate Scheme if you’re closely associated with another business. Basically, you’re deemed an ‘associated’ business if you’re under the main influence of a separate business, one that gives directions to your business.
If you’re feeling unsure as to whether this would apply to your business, we would recommend contacting HMRC directly for assistance.
You also won’t be able to use the scheme alongside the Cash Accounting Scheme. You’ll need to use the scheme-specific cash-based turnover method: this involves applying your flat-rate percentage to any VAT inclusive supplies for which you’ve been paid within the accounting period.
Whether or not you should join the VAT Flat Rate Scheme is a complex question, and will entirely depend on your specific business circumstances.
We’d recommend speaking to your accountant first, or a specialist, to get clear understanding of whether the scheme is right for you. If you don’t have one, you can use our guide to finding the right accountant for your business.
The main benefit for joining the scheme is that it will make accounting much less complicated. It makes it significantly easier to calculate and pay the VAT you are due, which is particularly beneficial during that stressful time when you need to submit your tax return.
Crucially you could, in theory, save more money by being part of the flat rate scheme as your fixed rates could be lower than the standard rate.
However, how beneficial the scheme will be for you will depend on your circumstances. For example, if you buy and sell goods from outside the UK this may make the scheme too complex to use.
The simplicity of the Flat Rate Scheme also tends to favour smaller businesses with lower transaction totals. If you’re a more complicated business with a higher volume of transactions, you may be better off without the scheme.
Similarly, if you’re making lots of VAT exempt sales, you could end up paying more in VAT. The same goes for zero-rated sales, as lots of these will also cost you more in VAT ultimately.
When should I leave the scheme?
You’ll need to leave the Flat Rate Scheme under some specific circumstances. For example, you’ll need to leave if:
Upon the anniversary date of you joining the scheme, your turnover from the previous 12 months is over £230,000 (including VAT). The same applies if you expect your turnover to exceed this amount in the next 12 months.
If you also expect your total income to be more than that figure in the next 30 days, you’ll also need to leave the scheme.
First things first: you’ll need to be already registered for VAT in order to join the Flat Rate Scheme. If you’re not registered for VAT, you can join the VAT Flat Rate Scheme as part of the same process.
You can find more information in our full guide to registering for VAT.
If you’re already registered for VAT and want to join the Flat Rate Scheme you can do so either online via the government portal or by post. You’ll need to do so using form VAT600FRS.
To join, you will need the following to hand:
- The name of your business as it appears on your VAT Certificate of Registration, and the address of your business.
- Your VAT registration number.
- A contact phone number.
- The type of business you run – this will be the main activity, defined by the most relevant category in the table above.
- The flat rate percentage for your business type (again, use the table above).
- The start date from which you’ll begin using the scheme: HMRC states this is usually from the start of the VAT period after they receive the application.
If you application has been successful, you will be notified through your online VAT account (or through the post, if you’ve used a paper application).
What if I want to leave the scheme?
You’re free to leave the scheme anytime you choose. You just need to contact HMRC with your name, signature, VAT number and business name and address. You can contact them through email, post or by phone.
Just keep in mind, once you leave the scheme, you’ll need to wait at least a year before rejoining again.
In Summary
As long as your VAT turnover meets the threshold of £150,000 or less, excluding VAT, the VAT Flat Rate Scheme can be a great option for small business owners who want to simplify their VAT payments to HMRC and have an easier time with their bookkeeping.
Whether it’s right for you will depend on your circumstances, but it is generally suited to businesses with a low transaction volume. We’d recommend talking to an accountant or specialist to get more tailored advice as to whether you should be joining the scheme.
The next step for business owners is making sure they fully understand Making Tax Digital, and are compliant with keeping digital VAT records.
The post What is the VAT Flat Rate Scheme and how does it work? appeared first on Startups.co.uk.
