What is the VAT Flat Rate Scheme?
Since writing this blog, HMRC have introduced the 'limited cost business rules' which will put off most businesses. You’re classed as a ‘limited cost business’ if your goods cost less than either 2% of your turnover or £1,000 a year (if your costs are more than 2%). This means you pay a higher rate of 16.5%. You can calculate if you need to pay the higher rate and work out which goods count as costs.
Usually, the amount payable to HMRC is the VAT on your sales minus the VAT on your purchases.
With the Flat Rate Scheme, you pay a fixed rate (dependent on your business activity) on your gross sales.
Say I was a management consultant (currently a fixed rate of 14%) and I made sales in one 3 month period of £10,000 + VAT = £12,000.
I would pay 14% on the gross sales figure of £12,000 to HMRC = £1,680 instead of the £2,000 I would have had to pay on the normal scheme.
The drawback is that you cannot claim VAT on your expenses (except for certain capital assets over £2,000, such as an expensive computer) – but how much in VATable expenses would a consultant have? A mobile phone and a bit of computer equipment perhaps………I wouldn’t have thought it added up to £2,000 - £1,680 = £320 per quarter in VAT.
Flat Rate Scheme Advantages
It’s much simpler to calculate a fixed percentage on your sales than to account for VAT on every sale and purchase.
You’ll receive a 1% reduction in your rate in your first year as a VAT registered business.
More often than not a business saves money on the scheme – which is always good!
Find the rates for different business activities here: www.gov.uk/vat-flat-rate-scheme/vat-flat-rates
To join the Flat Rate Scheme your turnover must be less than £150,000 (excluding VAT) and you must leave the scheme if your turnover exceeds £230,000 (including VAT).