VAT Flat Rate SchemeThe 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).

VAT Flat Rate Scheme Pros

  • The VAT calculation is straightforward, however, do make sure you use the correct percentage and use your gross sales figures, not your net figure!
  • VAT on larger capital purchases (>£2,000) and VAT incurred pre-registration can still be claimed.
  • If your VAT purchases are relatively low you could potentially make additional profit.
  • You will receive a 1% discount in the first year if you are newly VAT registered.

VAT Flat Rate Scheme Cons

  • All taxable sales are included in the calculation including if they are zero rated or exempt, so you could pay across more VAT than you have collected.
  • Not suitable if you currently receive regular VAT rebates.
  • If you purchase a higher ratio of standard VAT items than the HMRC flat rate indicates your sector uses.

How To Calculate Flat Rate VAT

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.

Flat Rate VAT Example

Journalism has a flat rate of 12.5%. (as at Dec11)

Emily Jones is a freelance journalist in Newbury and has billed £24,000 in gross sales (£20,000+VAT at 20%) between her VAT period of October to December 2011. Total business expenses that she incurred during the period was £1,500, all of the expenses incurred VAT (£1,250 + VAT at 20%).

If Emily used the standard VAT scheme the VAT she would pay to HMRC would be as follows:

  • £4,000 sales VAT
  • Less (£250) purchase VAT
  • £3,750 VAT to pay to HMRC

If Emily used the Flat Rate VAT Scheme, the VAT due would be calculated as follows:

  • Journalism has a flat rate of 12.5%. (as at Dec11)
  • Gross sales £24,000 multiplied by 12.5%
  • £3,000 VAT to pay to HMRC

This results in Emily in paying £750 less to HMRC when she pays her VAT bill, which therefore increases her business profits.

For further information on the Flat Rate Scheme for VAT see the HMRC website.

What to do next?

If you would like to discuss whether the VAT Flat Rate Scheme is suitable for your business contact your accountant or alternatively contact us...
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