Changes have coming in since this post was written so please check out https://emmastevensaccountancy.co.uk/changes-flat-rate-vat-scheme-1-april-2017/ for the latest update on the scheme
The VAT flat rate scheme is available for small companies with a turnover of £150,000 or less. The Flat Rate Scheme involves paying a fixed rate of VAT to HMRC. You can then keep the difference between what you charge the customers and what you pay HMRC. You can’t reclaim the VAT on your purchases except for certain capital assets over £2,000.
The scheme has several advantages to the small business. It is very simple to administer as you simply need to total up your sales invoices (including the VAT charged on them) for the quarter and multiply the total by your flat rate percentage to give the amount payable to HMRC. It is also useful for small businesses with low overheads as they may find they are better off financially through the VAT Flat Rate Scheme than by using the traditional method of calculating VAT.
How to Join
You can join the scheme via 2 ways. Firstly, you can register online for the Flat Rate Scheme when you complete your initial VAT registration. Alternatively, if you apply for the scheme after you become VAT registered you need to complete the form VAT600FRS.
To be eligible for the scheme you must be a VAT registered business with an expected VAT taxable turnover of £150,000 or less over the next 12 months. You can’t use the scheme if you left the scheme in the last 12 months or if you committed a VAT offence in the last 12 months (eg VAT evasion).
Leaving the scheme
You must leave the scheme if on the anniversary of joining your turnover in the last 12 months was more than £230,000 (including VAT) or if you expect it to be in the next 12 months.
VAT flat rate
The VAT rate you use will be dependent on your business type. Details of the various rates can be found here. For your first year as a VAT-registered business you can reduce your VAT flat rate percentage by 1%. The reduced rate lasts until the day before your registration anniversary.
How to calculate what you pay
A management consultant has a flat rate percentage of 14%. He bills a client £500, adding VAT at 20% to make a total bill of £600. To calculate the VAT due on the Flat Rate Scheme you multiply the total bill of £600 by 14% giving the amount due to HMRC as £84.
It is always advisable to seek professional advice when deciding if the flat rate scheme is suitable for you.
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