Free Guides for new and growing businesses from HRBS - fixed fee accountants and business advisors

Flat rate VAT scheme

flat rate vat scheme Flat rate VAT schemeIs the VAT flat rate scheme right for you?
Whether or not the VAT flat rate scheme is beneficial for you would depend upon the administration costs saving due to its simplicity weighed against the fact that in most circumstances, VAT on purchases (“input VAT”) cannot be reclaimed.

Use our handy calculator

We have created a handy Excel calculator for you to quickly work out whether you would be better off joining the scheme. Some businesses, in particular those with exempt supplies, may be worse off under the scheme.

Simplified VAT returns
The VAT flat rate scheme was introduced in 2002 to make VAT accounting easier for small businesses.

The simplified scheme means that businesses using the flat rate scheme do not need to identify input VAT on their purchases and overheads, instead VAT is calculated as a fixed percentage of gross sales ie sales + VAT on sales (“Output VAT”).

For example if your net sales in the quarter was £20,000. Gross sales would be £24,000 (ie £20,000 + £4,000 output VAT [20% x £20,000]). If your flat rate percentage is 11%, you would pay £2,640 VAT to HMRC at the end of the quarter whereas you would have received £4,000 of output VAT from your customers.

Input VAT is not deductible.
Under the flat rate scheme, input VAT is not deducted in your VAT return and from the amount payable to HMRC, so the scheme is not suitable for all businesses. However you can reclaim the VAT you have been charged on a single purchase of capital expenditure goods where the amount of the purchase, including VAT, is £2,000 or more.

Cash based VAT return.
The flat rate VAT scheme has its own cash based option, you simply apply the flat rate percentage to the VAT inclusive supplies for which you have been paid in the accounting period. You can also apply to join the annual accounting scheme and only submit one VAT Return per year.

Who can apply for the VAT flat rate scheme?
You can apply to use the scheme if there are reasonable grounds for believing that your taxable turnover (excluding VAT) in the next year will be £150,000 or less.

Once you join the scheme you can stay in it until your total business income is more than £230,000.

1% reduction in the flat rate for the first year.
As an incentive to join the scheme, new entrants receive a 1% reduction on their flat rate percentage for the first year of VAT registration.

Reverse charge VAT on Adwords

Although your Adwords spend is taken into account when calculating your VATable supplies for VAT registration purposes, it is not included in your flat rate turnover on your VAT return (see section 6.4 of the VAT Guide 733).

Aquisitions of goods from other EC member states

You must include the “deemed VAT” at 20% of the acquistions in Box 2 of your flat rate return. This puts you in the same position as if you had bought the goods from a UK supplier as the input tax (charged at 20%) would not deductible in your flat rate VAT return.

The Flat rate VAT scheme and affiliate marketing

This is a complex area and is covered in our easy to understand guide on how the VAT flat rate scheme applies to affiliate marketing.

Feel free to contact us to discuss your business and whether the VAT flat rate scheme is suitable for you.