Is the Flat Rate VAT Scheme Right for Your Business?

What is the Flat Rate VAT Scheme exactly?

The Flat Rate VAT Scheme was introduced to simplify the accounting process for small business owners. In simple terms, the Flat Rate VAT Scheme works by allowing business owners to pay a fixed amount of their annual turnover as VAT, rather than working out the exact amount of VAT they have to pay. The aim of the scheme is to allow businesses to pay more or less the same amount of VAT as they usually would, but without the extra burden of having to complete extra paperwork. 

The UK government introduced the Flat Rate VAT Scheme as part of the 2002 Budget. This scheme is designed to decrease the administrative burden of preparing VAT returns for UK businesses. 

Under the Flat Rate VAT Scheme, a business pays a set rate of VAT as a percentage of turnover. This eliminates the need to account for input and output VAT, which can save a busy business owner a lot of time and stress.  The set rate of VAT under the Flat Rate VAT Scheme is dependent of what type of business you operate. 

It should be noted that unlike the standard VAT scheme, the VAT Cash Accounting Scheme,  the VAT Margin Scheme, the VAT Retail Scheme or other types of VAT schemes, a business cannot reclaim VAT on any purchases it makes, although there are some exceptions for capital assets worth more than £2,000.

For some businesses, the Flat Rate VAT Scheme can increase their profit margins and greatly lessen the time spent on administration tasks. However, the intricacies of the scheme mean that is not a perfect fit for all businesses, so it makes sense to familiarise yourself with all the details before making a decision. 

Is your business eligible for the Flat Rate VAT Scheme?

If you are interested in joining the Flat Rate VAT Scheme, then your business will need to be VAT-registered and have an expected annual VAT taxable turnover of £150,000 or under (this figure is exclusive of VAT). 

If your business expects to earn more than £230,000 (including VAT) in the next 12 months, you will not be eligible to join the Flat Rate VAT Scheme. If your business turnover has reached or exceeded this amount on the first 12-month anniversary of joining the scheme, you will also no longer be eligible. If your turnover winds up being less than £85,000 (excluding VAT), you do not have to leave the scheme, but you do have the option to cancel VAT payments. 

A business is not eligible to join the Flat Rate VAT Scheme if it has left the scheme once during the past 12 months. A business is also not eligible f it has committed a VAT offence within the past 12 months. If a business is too closely tied to another enterprise, then it may also be ineligible to join the Flat Rate VAT Scheme. If your business becomes ineligible, it must leave the scheme. You can also leave at any time if you wish, simply by informing HMRC that you want to do so. 

To register for the Flat Rate VAT Scheme, you can fill out an online form at www.gov.uk or fill out form VAT600 FRS and email or post it to HMRC.

What you will pay with the Flat Rate VAT Scheme

The amount of VAT your business must pay to HMRC when using the Flat Rate VAT Scheme is determined by taking the flat rate applicable to your business and multiplying it by your business’ VAT-inclusive turnover.

For example, if a business has a turnover of £15,000 and a flat rate of 10 per cent, it will need to pay flat rate VAT of £1,500.

Although your flat rate is based on the type of business you operate, all businesses receive a one per cent discount during their first year as a VAT-registered enterprise. To determine what flat rate applies to your business, check the list on www.gov.uk.

Additionally, if your business purchases goods which cost less than two per cent of your turnover or less than £1,000 annually, you can be classed as a ‘limited cost business’ and will have to pay a higher rate of 16.5 per cent. The amount your business spends on goods per year does not include expenditures on food and drink, assets or capital goods or vehicles and vehicle parts. If, however, you operate a vehicle hiring business, then you can include vehicles and vehicle parts. There is an online calculator available on www.gov.uk that business owners can use to calculate their yearly expenditures on goods. 

Conclusion

The Flat Rate VAT Scheme can help small business owners to reduce the time and money spent on accounts and administration tasks. It can also make it easier to manage cash flow and can offer lower rates than standard VAT. However, some businesses may find that the Flat Rate VAT Scheme is not a good fit. A business that provides services rather than goods, for example, or a business that buys and sells goods outside the UK may find that the Flat Rate VAT Scheme does not suit their business models. 

Mooncard can help you to simplify your VAT accounting. To learn more about Mooncard, book a no-obligation, free demonstration.