Flat rate VAT scheme explained
The flat rate VAT scheme can be financially and operationally beneficial to eligible SMEs.
However, navigating the VAT minefield can be a difficult task and the government recommends that any small business considering the flat rate VAT scheme consults an accountant or tax adviser.
Who can use the flat rate VAT scheme?
Any business can join the scheme if it is VAT registered and its VAT taxable turnover isn’t expected to exceed £150,000 during the next 12 months. VAT taxable turnover is all income derived from goods or services that are not VAT exempt.
Enrolling for the scheme
Joining the flat rate VAT scheme is simple. A company can enrol online when they register for VAT. Or they can complete the VAT600FRS form and send them to the relevant tax offices by post.
Confirmation that a business has joined the scheme is sent online or via post.
How does it work?
Before you join the scheme you have to check the VAT rate for the sector in which your business operates.
There are more than 50 options, many of which have different VAT rates on the goods and services they provide.
Once in the scheme you pay a flat rate percentage on your gross turnover to HMRC.
-The primary advantage of the scheme is that it makes VAT accounting much simpler for SMEs
-It can cut down time on the administration burden of bookkeeping
-You pay discounted VAT to HMRC although you charge your clients 20% VAT
-You know precisely what your VAT outgoings will be each month
-In your first year as a VAT registered business your VAT rate is reduced by 1%
-The flat rate VAT scheme means there is less of an opportunity for accounting errors by SMEs.
-If you buy mostly standard-rated items, you cannot reclaim any VAT on your purchases if you are flat rate registered unless you buy an asset over £2,000.