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May 11, 2023

VAT Flat Rate Scheme Explained

VAT is the most complicated tax that a business has to deal with on a daily basis. Some businesses may be able to simplify their VAT affairs by joining the Flat Rate Scheme.

VAT Flat Rate Scheme Explained

VAT is the most complicated tax that a business has to deal with on a daily basis. Some businesses may be able to simplify their VAT affairs by joining the Flat Rate Scheme.

Flat Rate Scheme

But is this the right scheme for your business?​

Who is eligible?

Your business can join the flat rate scheme if in the next year your estimated VAT taxable turnover without adding VAT is £150,000 or less.

What is the flat rate scheme?

It is a scheme that should simplify your VAT accounting.Being in the flat rate scheme means that you do not reclaim VAT on your purchases (except on capital assets worth more than £2,000).It means that you calculate the VAT due to HMRC in a different way.

VAT Flat Rate Percentage

You calculate the VAT due to HMRC by reference to a flat rate percentage.You choose the percentage that best corresponds to your business sector from the list provided by HMRC.You only choose one percentage.​

How do I calculate the VAT

Your VAT is calculated in the normal way at 20% on your sales.So a sale of £1,000 becomes £1,200 including VAT.You do not have to account for your VAT on all your purchases.Instead the amount you pay over to HMRC is calculated by reference to the flat rate percentage as follows:

Gross sales (i.e. inclusive of VAT) x Flat Rate percentage applied for your industry.

Example:

John is an IT Contractor. His vatable turnover is £100,000 / year.His only costs are his salary, the train to work (which has no vat on it), sundry items and his accountant at £480 / year plus vat.

Standard VAT

If he was NOT on the vat flat rate scheme his vat would be as follows:

Output tax due to HMRC £100,000 x 20% = £20,000Input due reclaimed from HMRC £480 x 20% = £96 VAT due to HMRC = £19,904

Flat Rate Scheme

If he was on the flat rate scheme his percentage for his industry would be 14.5% So he would pay HMRC VAT of ….£100,000 plus vat = £120,000 x 14.5% =  VAT due to HMRC £17,400 John would be better off by £2,504 if he was on the flat rate scheme.

NOTE:

  • You have to compare this to claiming back VAT on your purchases. If you have a lot of VATable purchases then it may not be worth registering for the flat rate scheme.
  • Flat rates do vary from 4% to 14.5% so this calculation should be used as a guide only and reworked for the rate specific to your industry and your circumstances.
  • You can find out the rate for your industry at the HMRC web site, Flat Rate Scheme guide or contact us for more information.
  • In your first year of operating the scheme you can reduce the flat rate percentage by a further 1%.
  • Once you join the scheme you can stay in it until your total business income is more than £230,000.
  • Your VAT taxable turnover is the total of everything that you sell during the year that is liable for VAT including standard, reduced rate or zero rate sales or other supplies
  • ‘Profit’ made on the flat rate scheme is subject to corporation tax

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