Flat Rate VAT Explained

 In VAT

Under the Flat Rate VAT Scheme, the VAT process is simplified to help ease the administration of accounting for VAT for small businesses.

The VAT payable to HMRC is based on a percentage specific to the type of business you are in. See the full list of percentages here

You can apply for the Flat Rate Scheme is your turnover is below £150,000.

How it works

The flat rate percentage for a consultant is 14%.

  • You invoice a customer for £100 (net) and add VAT at 20%, which is £20 in output VAT.
  • The total the customer pays is £120.
  • The calculation for the amount payable to HMRC is (£120 x 14%) which is £16.80.
  • The output VAT is £20. The amount payable over to HMRC is £16.80. You keep the remaining £3.20.

The Flat Rate Scheme is an alternative to the cash accounting scheme. On the cash accounting scheme, you are required to analyse each individual item purchased for VAT (known as input tax), and deduct this amount from the sales VAT (known as output tax). See the Cash Accounting Scheme explained in more detail here

What are the benefits?

  • Effectively being on the flat rate scheme simplifies the accounting for VAT process and allows you to reclaim a percentage of the VAT towards your purchases where you would be unable to reclaim if you were not VAT registered.
  • It’s a simple scheme which can add thousands to your income for very little work.
  • In the first year you receive a 1% decrease on the percentage allocated to you by HMRC thereby making further savings.
  • If you make capital purchases over £2,000, the VAT for these items can be reclaimed at 20% as per the cash accounting scheme.

What are the disadvantages?

  • One consideration is that if you are a business that sells to non VAT registered businesses or consumers, then charging VAT will make your services more expensive. Consumers who are not VAT registered will not be able to reclaim the VAT charged to them.
  • Generally, the flat rate scheme suits business-to-business transaction based businesses rather than business-to-consumer based businesses. The businesses you invoice who are VAT registered will be able to reclaim the VAT charged to them, making your services no more expensive.

Anything else?

  • If you make sales to EU businesses, then these are outside of the scope of UK VAT and are therefore excluded from the Flat Rate Scheme calculations.

What is the VAT threshold?

The threshold for VAT registration is currently turnover of £83,000 or more. If you are over this amount in any twelve-month period, you must become VAT registered.

What’s the Bottom line?

If you are over the threshold for VAT registration, then you must register for VAT and have the option to join either the Cash Accounting or Flat Rate VAT Scheme. If you are below the threshold, you can opt to register for VAT voluntarily if this would prove more financially beneficial for your business. Please contact us to discuss which option is best for you.

Update on Flat Rate VAT

The Chancellor announced changes to the VAT Flat Rate scheme in the Autumn Statement in November 2016.

The change will affect business which spend very little on the purchase of goods e.g. stationery and repairs and renewals. The Chancellor has named these businesses ‘Limited Cost Traders’, reflecting the nature of their purchases.

A Limited Cost Trader is a trader that spends less than 2% of its sales on goods (not services) in an accounting period. A company would also be categorised as a Limited Cost Trader if it spends less than £1,000 a year, even if this is more than the 2% of turnover on goods. Read more about the changes here

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