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VAT Flat rate scheme

By Liz Lockwood
14th Sep 2023

The flat rate scheme was introduced by HMRC as a method of simplification for small businesses and is often overlooked.

The underlying principles are to simply apply a fixed percentage to your total gross sales for the period and that becomes the amount payable to HMRC.  The alternative standard approach requires businesses to identify the VAT amounts payable on each item of income during the quarter, along with the VAT on each item of expenditure, the difference between the sales VAT and purchase VAT being payable to HMRC.  Where VAT is charged by your suppliers, it could be at the standard 20% or reduced 5%, and you don’t have an automatic right to reclaim this. In certain situations VAT recovery can be blocked or restricted.  Use of the flat rate scheme removes this uncertainty.

Who can use the scheme?

The first consideration is HMRC’s criteria; the scheme is aimed at small businesses, so your expected turnover in the next 12 months must be below £150,000 to join the scheme.   After joining you can continue until your gross annual turnover exceeds £230,000.  There are some exclusions including if you left the scheme in the last 12 months. As the VAT payable under the scheme is calculated as a percentage of turnover, if your business is regularly in a refund position (for example some or all of your income doesn’t attract VAT), the flat rate scheme would not be the right choice

What percentage would apply?

If your business is classed as a Limited Cost Trader, a rate of 16.5% will apply. A limited cost trader is a business that spends less than either 2% of turnover or £1000 a year on qualifying goods. Goods are moveable items or materials used exclusively in the business, including goods for resale (except where this isn’t the main business activity), stationary, materials provided by a subcontractor, and gas & electricity used exclusively by the business.

For all other businesses, HMRC publish a list of rates determined by business type, for example 6.5% for pubs, 11% for agricultural services, 9% for packaging, and 9% for food manufacturing.

If you use the flat rate scheme within the first 12 months of VAT registration, you get a 1% discount on the published rates.

Finally, it’s important to remember that the flat rate percentage should be applied to your total VAT inclusive income for the period.