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Flat rate VAT schemes


The standard VAT a business has to pay or claims back from HM Revenue and Customs is the difference between the VAT they charge customers and pay on their purchases. But, you also have the possibility to join the Flat Rate Scheme that can provide you a series of advantages.


What is the Flat Rate VAT scheme

Using the Flat Rate Scheme, you can pay VAT as a fixed percentage of your VAT inclusive turnover, and the percentage depends on your type of business you own. Rather than accounting the VAT on every payment, you will only pay a single flat rate percentage on your whole turnover, when you do your quarterly report, but you still need to show VAT on your invoices.

If you use the Flat Rate Scheme you can’t reclaim any of the VAT that you pay on purchases, but in some conditions you may be able to claim back the VAT on capital assets worth more than £2,000.

The VAT percentage you pay is considerably lower than the standard VAT rate; you then keep the difference as your profit. Also, you get a one per cent reduction in your flat rate percentage in your first year of VAT registration.


How to join the Flat Rate Scheme

To join the Flat Rate Scheme you must apply to HMRC and your VAT turnover must be less than £150,000. You can use the scheme until your total business income is more than £230,000.


How to work out your flat rate percentage

There are different flat rate percentages for every business sector. To work out your flat rate percentage, you must choose the sector that best describes your activity. Keep in mind that you can only use one rate, so if you cover more then one business sector, you must use the greater percentage.


How to work out how much VAT you need to pay

You can calculate the VAT you have to pay to HMRC by applying your flat rate VAT percentage to your “flat rate turnover’. If you joined the VAT registration for less then a year, don’t forget to reduce your flat rate percentage by one.


Leaving the Flat Rate Scheme

You may leave the scheme any time you choose to; HMRC will confirm the date you left the scheme in writing.

Keep in mind that you are obligated to leave the scheme if your total business income is more than £230,000, if you start to use other special schemes or if you register for VAT as a division of a larger business.

HMRC may take you off the Flat Rate Scheme if they find out you have calculated your VAT incorrectly or you should have left the scheme since you where no longer eligible and you did not informed them. After leaving the Flat Rate Scheme, you can’t rejoin for at least another 12 months.

The flat rate scheme is not advisable for all businesses, and before deciding to join, you should always speak to an accountant or consult the VAT section of the HMRC website.

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