VAT flat rate scheme explained
Businesses turning over £90,000 or more in a 12 month period are legally required to register for VAT. This is a tax that is:
- paid on purchases the company makes
- charged to a company’s customers for products or services
If a company spends more on VAT than it charges, it can claim the difference back from HMRC. If, however, it charges more than it spends, the surplus is paid to the taxman. For smaller businesses, the regular VAT scheme can be a hassle, which is why the flat rate scheme is useful.
What is the VAT flat rate scheme?
The flat rate scheme is designed to simplify the way VAT is handled for businesses that typically charge more VAT than they spend on purchases. It enables organisations to pay a fixed VAT rate to HMRC despite continuing to pay and charge the normal rate of 20% on purchases and sales. The rate you pay depends on the type of business you operate.
Accounting and bookkeeping firms, law firms and computer or IT consultancy firms are charged a relatively high rate of 14.5%. Pubs and fuel retailers, on the other hand, are charged just 6.5%. Your company can then keep the difference between what it charges customers and what it pays to HMRC, helping to boost profit.
The main drawback of using the flat rate scheme is that you cannot reclaim VAT on purchases, except on qualifying capital assets of over £2,000.
Who is eligible for the scheme?
Any business that is VAT registered and expects their VAT taxable turnover to be less than £150,000 over the next 12 months can join the flare rate scheme. Exceptions include those who have committed a VAT offence in the last year, and those who have left the scheme during the past year. If you’re unsure about your eligibility, a reputable accountant can provide advice.
How does the scheme work?
You can find a list of VAT charges for each business sector here. You can then calculate what you owe by multiplying your flat rate by your VAT inclusive turnover. For example:
- Your computer repair business bills a customer £1,000, adding VAT at 20% to make £1,200 in total.
- The VAT rate for your sector is 10.5%, so you pay 10.5% of £1,200 – a total of £126.
Under the scheme, the business charges £200 VAT but only pays £126 of it to HMRC. Note, however, that the company is now not allowed to claim back any VAT it spends on the purchase of tools or equipment, for example.
Should my business join the flat rate scheme?
If you think the VAT flat rate scheme may be beneficial to your organisation, it’s wise to seek advice from a professional before signing up. An accountant can help you determine which VAT scheme best meets your needs and assist with preparing and filing quarterly VAT returns
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