VAT Flat Rate Scheme

The Flat Rate VAT Scheme is designed to simplify the VAT process for small businesses. Under this scheme, businesses pay a fixed percentage of their turnover as VAT rather than calculating VAT on every transaction. This article will provide a comprehensive guide to the Flat Rate VAT Scheme, including the key aspects of the scheme, the list of flat rate percentages for various business categories, eligibility requirements, and the benefits and disadvantages of using the scheme.

What Is the Flat Rate VAT Scheme?

The Flat Rate VAT Scheme allows small businesses to pay VAT to HMRC as a fixed percentage of their gross turnover (including VAT) instead of working out the VAT on each transaction. The fixed percentage varies depending on the type of business, and the goal is to simplify VAT reporting.

Under the scheme, businesses:

• Charge VAT at the standard rate of 20% to their customers (or the appropriate reduced or zero rates where applicable).

• Pay a lower, fixed percentage of their gross turnover (which includes VAT) to HMRC based on their business sector.

Businesses using the Flat Rate Scheme cannot reclaim VAT on their purchases, except for specific capital assets that cost over £2,000 (including VAT) in a single purchase.

Who Can Use the Flat Rate VAT Scheme?

Businesses can join the Flat Rate Scheme if they:

• Have an expected VAT taxable turnover of £150,000 or less (excluding VAT) in the next 12 months.

• Are VAT registered in the UK.

Businesses must leave the scheme if their total VAT-inclusive turnover exceeds £230,000 at the end of any tax year.

How the Flat Rate VAT Scheme Works

Here’s a step-by-step process for how the scheme works:

1. Charge VAT as usual: A business still charges its customers 20% VAT on its goods or services (or a lower VAT rate if applicable).

2. Apply the flat rate percentage: The business then applies a fixed percentage to its VAT-inclusive turnover and pays this amount to HMRC. The percentage varies based on the business type.

3. Retain the difference: The business gets to retain the difference between the VAT charged to customers and the amount paid to HMRC.

4. No VAT on expenses: Under the Flat Rate Scheme, businesses generally cannot reclaim VAT on their purchases, except in the case of capital assets costing £2,000 or more.

Flat Rate Percentages by Business Category

The Flat Rate VAT percentage varies based on the industry in which the business operates. Below is an exhaustive list of the flat rate percentages for various business sectors:

1. Accountancy or book-keeping services – 14.5%

2. Advertising – 11%

3. Agricultural services – 6.5%

4. Any other activity not listed elsewhere – 12%

5. Architect, civil and structural engineer or surveyor services – 14.5%

6. Boarding or care of animals – 12%

7. Business services not listed elsewhere – 12%

8. Catering services, including restaurants and takeaways – 12.5%

9. Computer and IT consultancy or data processing – 14.5%

10. Computer repair services – 10.5%

11. Entertainment or journalism – 12.5%

12. Estate agency or property management services – 12%

13. Film, radio, television or video production – 13%

14. Financial services – 13.5%

15. Forestry or fishing – 10.5%

16. General building or construction services – 9.5%

17. Hairdressing or other beauty treatment services – 13%

18. Hotel or accommodation services – 10.5%

19. Labour-only building or construction services – 14.5%

20. Legal services – 14.5%

21. Leisure services – 8%

22. Management consultancy – 14%

23. Manufacturing fabricated metal products – 10.5%

24. Manufacturing food – 9%

25. Manufacturing not listed elsewhere – 9.5%

26. Manufacturing yarn, textiles or clothing – 9.5%

27. Medical services not listed elsewhere – 12%

28. Membership organisation – 8%

29. Mining or quarrying – 10%

30. Motor vehicle maintenance and repair – 8.5%

31. Packaging – 9.5%

32. Photography – 11%

33. Postal and courier services (not public postal services) – 8.5%

34. Printing – 8.5%

35. Publishing – 11%

36. Pubs – 6.5%

37. Recruitment agency services – 12%

38. Retailing food, confectionery, tobacco, newspapers or children’s clothing – 4%

39. Retailing pharmaceuticals, medical goods, cosmetics or toiletries – 8%

40. Retailing not listed elsewhere – 7.5%

41. Social work – 11%

42. Sport or recreation services – 8%

43. Transport or storage, including taxis – 10%

44. Travel agency – 10.5%

45. Veterinary medicine – 11%

This list represents the range of flat rate percentages assigned to different industries. It’s essential for businesses to select the correct category to ensure compliance with VAT regulations.

How to Apply for the Flat Rate Scheme

To apply for the Flat Rate Scheme, businesses need to:

• Be VAT-registered: You must have a VAT registration number before applying for the scheme.

• Check eligibility: Your VAT taxable turnover must be less than £150,000 (excluding VAT).

• Apply online or by post: You can apply via your online VAT account or by filling out the VAT600 FRS form and sending it to HMRC.

Once accepted, businesses will receive confirmation from HMRC that they are now part of the scheme. You can leave the scheme at any time, provided you inform HMRC.

Advantages of the Flat Rate VAT Scheme

1. Simplicity: One of the main advantages of the scheme is its simplicity. By applying a fixed rate to your gross turnover, it makes VAT calculations easier and reduces administrative burdens.

2. Potential for financial benefits: If a business’s VAT rate under the Flat Rate Scheme is lower than the VAT charged to customers, the business can potentially keep the difference.

3. Fixed VAT rate: The scheme eliminates the need for complicated VAT calculations on every transaction, providing a straightforward approach to paying VAT.

4. No need to track VAT on purchases: Unlike the standard VAT scheme, there’s no need to worry about reclaiming VAT on purchases (except for capital assets over £2,000).

Disadvantages of the Flat Rate VAT Scheme

1. Limited ability to reclaim VAT: Businesses cannot reclaim VAT on most purchases, which could be a disadvantage if a company has high expenses or capital investment costs.

2. Potential to pay more VAT: In some cases, businesses may end up paying more VAT under the Flat Rate Scheme than they would under the standard scheme, especially if they have a high number of zero-rated or reduced-rated sales.

3. Not suitable for all businesses: The scheme is best suited for businesses with low overheads. Companies with significant expenses might be better off using the standard VAT accounting method.

What Is the VAT Flat Rate for Limited Cost Traders?

If your business is classed as a Limited Cost Trader, you must use a fixed flat rate of 16.5%. A Limited Cost Trader is a business that spends less than 2% of its turnover on goods (excluding VAT, and excluding capital goods, food, and fuel) during an accounting period.

What Happens if You Leave the Flat Rate Scheme?

You may choose to leave the Flat Rate Scheme voluntarily or be required to leave if your VAT-inclusive turnover exceeds £230,000. Upon leaving, you must inform HMRC and resume using standard VAT accounting.

Conclusion

The Flat Rate VAT Scheme offers small businesses in the UK a simplified way to handle their VAT obligations. By applying a fixed rate based on their industry sector, businesses can reduce the complexity of their VAT calculations. However, the scheme is not suitable for every business, particularly those with high input costs, as it limits VAT recovery.

Before opting into the Flat Rate Scheme, it’s important to carefully evaluate your business type, expenses, and turnover to determine whether this scheme will provide financial benefits or whether the standard VAT accounting method is more appropriate. For detailed advice on your specific situation, consult with a VAT advisor or tax professional.