How does the VAT flat rate scheme work?

Business reviewing their eligibility for the VAT flat rate scheme
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    Disclaimer: This article is based on legislation which was correct at time of publishing on April 4, 2024
    This page was last updated on April 4, 2024

    As businesses grow, their financial responsibilities tend to increase, too. Navigating the intricacies of tax obligations, specifically VAT, can be daunting for growing businesses. If you are wondering how to improve your VAT processes or make more significant savings, you may benefit from the VAT Flat Rate Scheme.

    The VAT Flat Rate Scheme is an easier way for businesses to calculate and pay VAT. Instead of tracking and reclaiming VAT on individual purchases and sales as they happen, HMRC allows eligible businesses to apply a “fixed rate” percentage to their total turnover, inclusive of VAT.

    At Butt Miller, we are a team of highly skilled chartered accountants helping small businesses and established limited companies understand the complexities of Value Added Tax (VAT). Our specialist VAT accounting services focus on adding value and increasing profits for your business. We’re here to help you see the bigger financial picture.

    In this blog, our VAT experts dive into the VAT Flat Rate Scheme, explaining what it is, if your business could be eligible and how you can benefit from it. Keep reading if you want to learn how to sign up for this hassle-free VAT scheme, or get in touch with one of our specialist VAT accountants today to see what we can do for you.

    What is the Flat Rate Scheme?

    The traditional VAT method requires calculating VAT on each product or service you sell and subtracting the VAT paid on your business expenses. If you have limited time and resources, then standard VAT accounting can make bookkeeping more challenging and time-consuming.

    The VAT Flat Rate Scheme provides eligible VAT-registered businesses a more straightforward way to calculate and pay VAT to HMRC.

    Rather than calculating VAT on each transaction, the Flat Rate Scheme essentially allows you to pay a fixed percentage of your overall sales to HMRC (also known as your “fixed rate”).

    The main difference between the Flat Rate Scheme and other VAT schemes is that you pay Value Added Tax at a lower rate than the standard 20%. However, this does mean you won’t be able to claim VAT on your purchases unless they are certain capital assets over £2,000.

    The flat rate percentage can vary depending on the type of business and the goods and services you sell. HMRC has a helpful guide covering numerous industries, including construction services, companies selling personal or household goods, real estate businesses and many more.

    Is my business eligible for the Flat Rate Scheme?

    If you are looking to simplify your VAT accounting and potentially save money, then the VAT Flat Rate Scheme can benefit you.

    To determine whether your business is eligible for the VAT Flat Rate Scheme, you must meet specific eligibility criteria. We have provided a couple of questions below to help you determine your eligibility.

    1) Am I registered for VAT? As a UK business, you’ll need to be VAT-registered to be able to join and benefit from the VAT Flat Rate Scheme.

    2) What is my taxable turnover? You must also have an expected taxable turnover of £150,000 or less in the next 12 months (excluding VAT).

    Is the Flat Rate Scheme worth it?

    Every company is different. They each have their own unique set of challenges to face and goals to work towards. Whether or not the VAT Flat Rate Scheme will benefit your business will depend on the type of business you operate, what you are selling and how much VAT your business pays.

    If you are wondering whether the Flat Rate Scheme is worth it for your business, it is important to look at the potential benefits and drawbacks in greater detail.

    Benefits of the Flat Rate Scheme

    The VAT Flat Rate Scheme may be more beneficial for small businesses with a simpler VAT structure and a lower volume of transactions.

    Some of the benefits can include:

    • Simpler and more efficient bookkeeping
    • Potential overall lower VAT liability if your trading profile suits the flat rate scheme
    • Improved record-keeping

    Drawbacks of the Flat Rate Scheme

    If you have a larger business with a more complex VAT structure or a higher volume of transactions, then you may find that the Flat Rate Scheme makes paying VAT more hassle for your business.

    Some of the drawbacks can include:

    • You could potentially pay more VAT, especially if you make a lot of zero-rated or VAT-exempt sales
    • You can’t reclaim VAT on certain purchases and business expenses
    • You must meet certain eligibility criteria

    When must you leave the VAT Flat Rate Scheme?

    Since the VAT Flat Rate Scheme requires certain eligibility criteria to enable you to join, you will need to leave the scheme if you no longer meet the criteria.

    You’ll also need to leave the Flat Rate Scheme if you expect your taxable turnover to exceed £230,000 (including VAT) in the next 12 months or if it has exceeded this in the previous 12 months on the date of joining. You’ll urgently be required to leave the scheme if you expect your income to exceed £230,000 in the next 30 days.

    While these are written mandatory expectations to ensure you comply with HMRC, if you wish to leave the Flate Rate Scheme for alternative reasons, then you may be able to do so.

    How do I get off the flat rate VAT scheme?

    You can choose to leave the Flat Rate VAT scheme at any point by writing to HMRC. They will then inform you of your official leaving date. You must ensure that you pay HMRC if you have an outstanding VAT bill, and it is essential to know what your VAT responsibilities will be moving forward.

    It is important to note, that if you happen to leave the VAT Flat Rate Scheme, then you will not be able to rejoin for at least 12 months.

    Looking for VAT advice? Get in touch with Butt Miller

    Are you looking for a dedicated VAT accountant for your financial needs? At Butt Miller, we are helping VAT-registered businesses maximise their financial efficiency, saving time and money in the process.

    Whether you’re wondering which VAT schemes are best for your business or you need help with a particularly tricky VAT return, the expert VAT accounting team at Butt Miller can solve your needs. We will handle all your VAT obligations, ensuring timely and accurate submissions of VAT returns and keeping you compliant at all times.

    Contact Butt Miller today for full support with your VAT accounting needs.

    Frequently asked questions about the VAT Flat Rate Scheme

    For more information about the HMRC Flat Rate Scheme, please take a look at some of our popular FAQs below.

    What is the difference between VAT-inclusive turnover and VAT-taxable turnover?

    VAT-inclusive turnover is the total revenue generated by your business, including any VAT charged on your products or services. Essentially, it is the full amount your business charges for its sales.

    VAT taxable turnover, on the other hand, specifically refers to the total amount of taxable supplies made by your business after all VAT exemptions have been calculated.

    Can I change my VAT flat rate percentage?

    You can only change your VAT flat rate percentage if your business’s VAT structure changes, i.e. you start selling goods or services that are subject to different flat rate percentages, or you end up fitting into the limited cost business category.

    What are limited cost businesses?

    If your business pays a small amount on goods (less than 2% of your turnover or less than £1,000 in a year), then you are classed as a limited cost business. If this is the case, then you will be required to pay a higher flat rate percentage of 16.5% to HMRC.

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