Definition
The VAT Flat Rate Scheme is an HMRC scheme that lets a small VAT-registered business pay HMRC a fixed percentage of its VAT-inclusive turnover, instead of working out the difference between VAT on sales and VAT on purchases. A business can join if it expects VAT taxable turnover of £150,000 or less (excluding VAT) over the next 12 months. The percentage depends on the business sector.
How the flat rate works
Customers are still charged VAT at the normal rate. The business multiplies its VAT-inclusive turnover by its sector’s flat rate, pays that to HMRC and keeps the difference. VAT on purchases is not reclaimed, apart from certain capital assets over £2,000, and there is a 1% reduction in the first year of VAT registration.
An established IT consultant billing £60,000 plus £12,000 VAT would pay HMRC £10,440 at the 14.5% sector rate (14.5% of £72,000), provided it is not a limited cost trader.
When a business must leave
A business must leave if, on the anniversary of joining, its turnover for the last 12 months was over £230,000 including VAT, or it expects to pass that level. The scheme cannot be used alongside the Cash Accounting Scheme. SmartFiling’s VAT schemes compared guide adds worked examples.
Related questions
- Which VAT scheme is best for a small business? The Flat Rate Scheme can suit businesses with little VAT to reclaim, unless they buy so few goods that the 16.5% limited cost rate applies; standard accounting then usually costs less.
- What is a limited cost trader? A Flat Rate Scheme user whose spending on goods is below 2% of turnover or £1,000 a year, which must use a 16.5% rate.
Related terms
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Limited cost trader
A limited cost trader (HMRC calls it a "limited cost business") is a business on the VAT Flat Rate Scheme whose spending on relevant goods, including VAT…
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VAT return
A VAT return is the report a VAT-registered business sends to HMRC, usually every three months, showing how much VAT it charged on sales (output VAT)…
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VAT registration threshold
The VAT registration threshold is the level of VAT-taxable turnover at which a UK business must register for VAT with HMRC. It is £90,000.
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Input and output VAT
Output VAT (output tax) is the VAT a VAT-registered business charges on its sales. Input VAT (input tax) is the VAT it pays on goods and services bought for the business.
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