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Flat Rate Scheme for VAT: How does it work?

  • There are those who champion it as a big money saver. Recently, we have had questions relating to this scheme from clients asking us how it works and if it would be beneficial for their business. We have had to reassure clients that if they qualify for this scheme then they have already been automatically placed on it. However, for those without an accountant this is certainly something you should look into and seek advice if you think you are eligible.

    There are cases where money can certainly be saved by using the flat rate scheme for VAT but you have to be eligible – and the majority of people are not.

    Do you qualify?

    First of all your VAT taxable turnover needs to be less than £150,000.

    This total includes everything that you sell (products and services) that are liable for VAT in that year. This includes standard, reduced rate and zero rates sales or other supplies but excludes the actual VAT that you charge and exempt sales and sales of any capital assets.

    You also need to be in a position where you do not claim back VAT on purchases because you cannot reclaim VAT back on purchases under the flat rate scheme. In addition if you regularly receive a VAT repayment under the normal VAT rules or make a lot of zero rated or exempt sales the scheme may not be right for you.

    When raising a sales invoice you charge the full VAT rate (20%). However, as mentioned above you do not claim input VAT on any expenses. The VAT you pay to HMRC on the flat rate scheme is at a lower rate depending on the category of your business. You should receive a 1% discount for the first year of registration.

    For example the current percentages for the following categories of business all differ:

    Advertising 11%

    Catering services, including restaurants and takeaways 12.5%

    General building or construction services 9.5%

    Printing 8.5%

    Architect 14.5%

    These are just a snippet of the business categories that exist.

    What does it look like on paper?

    1) As an architect you charge a client £200 + VAT (@ 20%) for services done.
    You receive a total of £240 including the £40 VAT.
    Under the flat rate scheme you pay 14.5% VAT or £34.80 to HMRC for this invoice.
    Therefore you would save £5.20 in VAT on this transaction.

    2) As a printer you charge a client £680 + VAT (@ 20%) for printing work done.
    You receive a total of £816 including the £136 VAT.
    Under the flat rate scheme you pay 8.5% or £69.36 to HMRC for this invoice.
    Therefore you would save £66.64 in VAT on this transaction.
    You may be able to claim back VAT on capital assets worth more than £2,000. Always check this and seek approval from HMRC.

    You cannot join the Flat Rate scheme if:

    You were in the scheme and left during the previous 12 months.

    You are or have been within the previous 24 months eligible to join an existing VAT group or registered for VAT as a division of a larger business.

    Your use one of the margin schemes for second hand goods, art, antiques and collectibles, the Tour Operators’ Margin Scheme, or the Capital Goods Scheme.

    You have been convicted of a VAT offence or changed a penalty for VAT evasion in the last year.
    Or, your business is closely associated with another business.

    If you are not sure then please do ask as this scheme is not appropriate for everyone. Those who do qualify certainly ought to be on it and we can help you with that as well. For those in doubt contact your accountant for advice. Feel free to call us on 01427 613613 and receive some friendly advice free of charge.