The VAT Flat Rate Scheme helps reduce the admin around VAT record keeping. Taking away the need for you to track every expense and report it to HMRC. But the scheme doesn\u2019t suit every business and can sometimes work out more expensive than the standard rate of VAT.<\/p>\n\n\n\n
Read on to understand how VAT-registered businesses can join the scheme, potential benefits for new businesses, and how to decide if it\u2019s the right option for you.<\/p>\n\n\n\n
This article covers the following:<\/p>\n\n\n\n
The Flat Rate Scheme is an alternative way to pay your VAT to HMRC, which can save you valuable time when it comes to your quarterly bookkeeping.<\/p>\n\n\n\n
Instead of paying the difference between the VAT you charge customers and the VAT you reclaim on business purchases, you can pay a fixed rate based on your total sales.<\/p>\n\n\n\n
This helps simplify your reporting as you can keep less detailed VAT records. That, along with the government\u2019s Making Tax Digital<\/a> plans, means you\u2019ll be able to maximise efficiency when it comes to your business admin.<\/p>\n\n\n\n The Flat Rate Scheme isn\u2019t the right choice for all businesses. Depending on your sector, you may find that you pay more VAT this way than through standard VAT accounting.<\/p>\n\n\n\n A few things to consider when making your decision:<\/p>\n\n\n\n To be eligible for the VAT Flat Rate Scheme, you must expect that your VAT taxable turnover will be \u00a3150,000 or less in the next 12 months. You must also be a VAT-registered business.<\/p>\n\n\n\n However, you won\u2019t be eligible to rejoin the scheme if you\u2019ve left it within the last 12 months.<\/p>\n\n\n\n You\u2019ll have to leave the scheme if your business grows to the point that:<\/p>\n\n\n\n The flat rate vat percentages vary depending on your main type of business activity, usually ranging from four to 16.5 per cent. You can find details on how much you pay<\/a> on the government website.<\/p>\n<\/div>\n\n\n\n If the flat rate for your business is 14.5 per cent and your total sales for a quarter are \u00a310,000 (including VAT) \u2013 your VAT liability would be \u00a31,450. <\/p>\n\n\n\n If you run a limited cost business, you would have to use the 16.5 per cent flat rate, and pay \u00a31,650.<\/p>\n\n\n\n The VAT Flat Rate Scheme can offer a simpler approach to VAT accounting for new business owners because you don\u2019t need to track VAT on most individual purchases. <\/p>\n\n\n\n But to join the scheme, a new business must expect its VAT taxable turnover in the next 12 months to be \u00a3150,000 or less (excluding VAT). You then receive a one per cent discount on the applicable flat rate percentage during the first year of your VAT registration.<\/p>\n\n\n\n Just make sure you register your business to the correct sector and pay the right rate of VAT. And check if your business would be considered a \u2018limited cost business\u2019. <\/p>\n\n\n\n HMRC defines you as a limited-cost business if your goods cost less than either:<\/p>\n\n\n\n As a limited cost business, you\u2019ll pay a 16.5 per cent flat rate.<\/p>\n\n\n\n In 2017, HMRC specified this new higher rate for \u2018limited cost businesses\u2019 as some businesses had previously been able to use the scheme to their economic benefit.<\/p>\n\n\n\n For example, the flat rate paid to HMRC on sales could be lower than the VAT rate businesses charge to their customers, so businesses could keep the difference.<\/p>\n\n\n\n Now it\u2019s likely that these changes to the VAT Flat Rate Scheme in 2017 have made the scheme less attractive for small businesses in terms of cost-saving, but you\u2019ll still be able to benefit from saving time on your VAT reports.<\/p>\n\n\n\n The scheme won\u2019t suit every business. To help see if the flat rate VAT scheme is right for you, we\u2019ve evaluated the pros and cons.<\/p>\n\n\n\n The scheme offers a simplified way of accounting. You don\u2019t need to track VAT on most individual purchases as you would with the typical way of working out your VAT liability. <\/p>\n\n\n\n And it\u2019s much easier to predict what your VAT bill will be each quarter because it\u2019s based on a fixed percentage against your turnover. This can make cash flow forecasts <\/a>much more straightforward.<\/p>\n\n\n\n The simpler approach also means you\u2019re less likely to make mistakes on your reporting, reducing the risks of a fine from HMRC<\/a>.<\/p>\n\n\n\n A significant downside of the scheme is that you can\u2019t reclaim VAT on your purchases. This is a particular issue for businesses that buy lots of goods. <\/p>\n\n\n\n And in some cases, businesses that purchase a high amount of goods can end up paying more VAT through the flat rate scheme. Because even though you\u2019re paying a lower rate of VAT, you\u2019ll miss out on reclaiming VAT and potentially end up spending more. <\/p>\n\n\n\n The first step is making sure you\u2019re registered for VAT<\/a>. Once you\u2019re set up, you can apply for the scheme online if your business is eligible. To join the scheme, your business must have an estimated VAT taxable turnover for the next 12 months that\u2019s \u00a3150,000 or less (excluding VAT). <\/p>\n\n\n\n And your business must not meet any of the following criteria: <\/p>\n\n\n\n It all depends on how your business operates. If you regularly purchase a high number of goods, the flat rate VAT scheme might not be for you, because you can\u2019t reclaim VAT. <\/p>\n\n\n\n And if you don\u2019t purchase enough goods and are categorised as a \u2018limited cost business\u2019 you may end up paying a higher rate of VAT with the flat rate scheme. <\/p>\n\n\n\n But there\u2019s a sweet spot for some businesses who purchase a reasonable amount of goods whilst accessing a lower rate of VAT through the scheme. These businesses also benefit from the simplified approach to accounting the scheme offers. <\/p>\n\n\n\n For a small business, the flat rate VAT scheme lets you pay a fixed percentage of your total sales to HMRC. Instead of tracking every single purchase to calculate how much VAT you owe. <\/p>\n\n\n\n The scheme also eliminates the need to reclaim VAT on your purchases, meaning your quarterly VAT bill will be easier to predict. And you\u2019ll also get a one per cent discount on your VAT bill. <\/p>\n\n\n\n But it\u2019s not suitable for every business. Make sure you look at the individual rate for your business\u2019s sector and take into account the amount of goods your business buys. <\/p>\n\n\n\n You can then evaluate whether your business would benefit more from a simplified, flat rate approach to VAT, or stick to the standard rate. <\/p>\n\n\n\n Yes, the first \u00a385,000 of your business\u2019s taxable turnover is VAT-free. The flat rate VAT threshold increased to \u00a390,000 in April 2024 (previously \u00a385,000). So the first \u00a390,000 of your taxable turnover is VAT-free and once it goes over that, you need to register, start charging, and pay VAT. <\/p>\n\n\n\n There isn\u2019t a single \u2018flat rate\u2019 for VAT. The rate of VAT you\u2019ll pay under the flat rate VAT scheme depends on a few factors. The sector your business is in and the amount of goods you purchase will determine your VAT rate. <\/p>\n\n\n\n To calculate your VAT on a flat rate you\u2019ll need to check the rate for your business\u2019s sector or see if your business is considered \u2018limited cost\u2019. Once you know your rate, you then apply it to your business\u2019s total sales for the three month period. <\/p>\n\n\n\n You\u2019re better off on the flat rate of VAT if you don\u2019t buy too many goods with VAT on them and want a simpler approach to accounting. If you’re a limited cost business or you purchase a high number of goods, the scheme might not be suitable. <\/p>\n\n\n\n If your VAT taxable turnover exceeds \u00a3230,000 in any 12-month period, you must leave the scheme. But it could be worth leaving the scheme sooner depending on your circumstances. <\/p>\n\n\n\n If your business starts buying more goods with VAT, your accounting is becoming too complex, or you become a \u2018limited cost business\u2019, it might be worth considering leaving the scheme <\/p>\n\n\n\n The limited cost business rule only applies to goods, not services. So if your business doesn\u2019t fall into that category and your sector has a VAT rate that\u2019s lower than the standard 20 per cent, the scheme can still be beneficial. <\/p>\n\n\n\n Yes, you can, but it does add an extra layer of complexity to your VAT accounting. The scheme was designed to simplify domestic sales for small businesses, so if you have a large number of international sales, it\u2019s worth contacting a tax professional.<\/p>\n\n\n\n With Simply Business you can build a single self employed insurance<\/a> policy combining the covers that are relevant to you. Whether it’s public liability insurance<\/a>, professional indemnity<\/a> or whatever else you need, we’ll run you a quick quote online, and let you decide if we’re a good fit.<\/p>\n\n\n\nIs the <\/strong>flat rate VAT scheme<\/strong> right for your business?<\/strong><\/h3>\n\n\n\n
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Is my business eligible for the flat rate?<\/strong><\/h2>\n\n\n\n
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What are the flat rates? <\/strong><\/h2>\n\n\n\n
Example: <\/strong>VAT Flat Rate Scheme<\/strong><\/h3>\n\n\n\n
VAT Flat Rate Scheme<\/strong> for new businesses<\/strong><\/h2>\n\n\n\n
What are limited cost businesses?<\/strong><\/h2>\n\n\n\n
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Advantages and disadvantages of the <\/strong>flat rate VAT scheme<\/strong><\/h2>\n\n\n\n
Advantages of the <\/strong>flat rate VAT scheme<\/strong><\/h3>\n\n\n\n
Disadvantages of the <\/strong>flat rate VAT scheme<\/strong><\/h3>\n\n\n\n
How to join the <\/strong>flat rate VAT scheme<\/strong>?<\/strong><\/h2>\n\n\n\n
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Which is better, flat rate VAT or standard VAT?<\/strong><\/h2>\n\n\n\n
Summary: understanding the VAT Flat Rate Scheme?<\/strong><\/h2>\n\n\n\n
Frequently asked questions<\/strong><\/h2>\n\n\n\n
Is the first \u00a385,000 VAT-free? <\/strong><\/h3>\n\n\n\n
What is the flat rate for VAT?<\/h3>\n\n\n\n
How do you calculate VAT on a flat rate?<\/h3>\n\n\n\n
Am I better off on flat rate VAT?<\/h3>\n\n\n\n
When should I leave the flat rate scheme? <\/h3>\n\n\n\n
If I don\u2019t buy many goods but use a lot of services, is the flat rate VAT scheme still beneficial? <\/h3>\n\n\n\n
Can I use the flat rate scheme if I sell abroad?<\/h3>\n\n\n\n
Looking for self-employed insurance?<\/h3>\n\n\n\n