The flat rate scheme is designed for small businesses with annual taxable turnover that doesn’t exceed £150,000 and whose annual total turnover (including income on which no VAT is paid) doesn’t exceed £230,000.
It is significantly different from normal VAT schemes in which input (purchases) VAT and output (sales) VAT is identified & recorded with the balance being paid to HMRC, or reclaimed if tax on expenses exceeds tax on sales.
When using the flat rate scheme, the business doesn’t have to identify and record every single VAT transaction to be able to calculate the net amount of VAT due. Instead, a flat rate percentage is charged on the total sales, Including VAT for each VAT period. The calculation produces the amount of VAT due.
The flat rate varies with trade sectors, here are some examples:
- Photography: 11%
- Pubs: 6.5%
- Food & Newspaper Retail: 4%
- Bookkeeping Services: 14.5%
An added benefit of the flat rate scheme is that a business, in its first year of VAT registration, receives a 1% reduction in its applicable flat rate percentage for 12 months following registration.
Calculating how much VAT you owe.
The calculation of the flat rate scheme is simple. Suppose you are a Pub Landlord and your quarterly sales income is £24,000, including VAT. Your flat rate is 6.5% and so your VAT liability is; £24,000 x 6.5% = £1,560
If you provide bookkeeping services and your quarterly sales income, including VAT, is £24,000, your VAT liability is; £24,000 x 14.5% = £3,480
How much VAT do you charge customers?
It is important to note that the flat rate is only used to calculate the amount of VAT you owe, because an allowance is made for input tax. Therefore, you charge your customers at the normal rate of VAT, currently 20%, and not at the flat rate!
Is the flat rate scheme right for my business?
However, the decision of whether to use the flat rate scheme does need careful consideration, as there are some circumstances where this scheme would leave you worse off. For example, if you sell zero rated goods (e.g. books), and you normally reclaim VAT because your inputs are higher than your outputs, you wouldn’t use the flat rate scheme. Unless you want to give your money away to HMRC!
Whilst you can’t reclaim VAT on purchases, you can reclaim the VAT for the purchase of certain capital assets (e.g. a computer) over £2,000 including VAT. However, if you sell it again, you will have to charge VAT at the full rate, and pay the VAT you receive to HMRC via the quarterly VAT Return.
The following records need to be kept for the flat rate scheme:
- The flat rate sales turnover for the accounting period.
- The flat rate percentage used.
- The VAT calculated as due.
- A VAT account – recording VAT paid under the scheme, and any VAT involved in the purchase or sale of a capital asset.
The flat rate scheme may also be operated with the annual accounting VAT scheme, making dealing with VAT far simpler for the small business. In this case not only is the VAT calculated as a basic percentage, it’s also only calculated one a year.