The Flat Rate VAT Scheme explained

For small and micro businesses, any tool that can save money is welcome. The Flat Rate VAT Scheme can, under certain circumstances, help to achieve this aim.

What is different?

Under standard VAT accounting, your business keeps a record of the VAT paid on purchases, and the VAT charged to your customers. You hand over the VAT collected from your customers, but you can claim back any VAT paid on purchases. The standard VAT scheme works best for businesses that pay more VAT on purchases than they collect from their customers in sales.

The Flat Rate Scheme simplifies record keeping and calculations – you simply calculate VAT payments as a percentage of your total VAT-inclusive turnover. Depending on your industry, this is usually a lower percentage than that which you will apply to your sales invoices (e.g. you can often collect VAT at 20% but pay it over at 11% or 12%). Therefore, the Flat Rate VAT Scheme works best for businesses that pay over less VAT in purchases than they collect in sales.

Important factors to consider

Only businesses with a VAT taxable turnover of £150,000 or less are eligible for the Flat Rate Scheme, so if you think you will soon exceed this threshold it may not be worth switching.

You won’t be able to claim back the VAT on purchases.

Those who sell products and services abroad will not be able to charge VAT to these customers, but the sales will still be included in the VAT-inclusive turnover. If you have more customers abroad than in the UK, you will need to talk to a VAT accountant to check whether you may actually lose money through the Flat Rate VAT Scheme.

For further help and advice, speak to one of our VAT accountants today who will be able to provide you with the expert guidance you need to make an informed decision.