The VAT Flat Rate Scheme was introduced in 2002 in order to encourage small businesses to register for VAT.
Many small businesses try to keep under the VAT threshold for various reasons, including avoiding additional administration and keeping their prices attractive versus the competition.
The aim of the VAT Flat Rate Scheme is to be simple to administer for small businesses, and therefore remove one of the barriers to business owners registering.
The VAT Flat Rate Scheme is available to businesses with a taxable turnover below £150,000 excluding VAT (also exempt and non-taxable sales should be below £37,500).
Under the standard VAT Scheme, the VAT charged to customers is netted against the VAT paid to suppliers. However, with the Flat Rate Scheme a flat rate percentage is applied to gross sales, the percentage depends on which sector you are in.