Flat rate VAT – is it for me?

The flat rate VAT scheme for small businesses was introduced to reduce time spent on administration of sales and purchases when operating VAT. Under the scheme a fixed percentage rate is applied to the turnover of the business as a one off as opposed to recording and calculating the VAT on each sale and purchase made.

If a business operates under the flat rate VAT scheme, you would calculate the VAT due as a flat rate percentage of your VAT inclusive turnover. For the purposes of the calculation this includes all income received by the business, be it for sales or other income such as bank interest.

The percentage used depends on the type of business and can range from 4% to 14.5%. If the business is newly registered for VAT, then a further 1% deduction applies in the first year after registration for VAT.

The flat rate VAT scheme is open to all businesses whose annual turnover excluding VAT, does not exceed £150,000 and your are required to leave the scheme should your taxable turnover (including VAT) reaches £230,000 (correct as of the 2015/16 tax year).

Even though the business would only account and pay VAT at the flat rate percentage applicable for their industry, it is still required to raise invoices showing the standard rate of VAT – currently 20%. This is to ensure that the customer who has been invoiced can reclaim the full 20% VAT on their VAT return, as they may not be operating under the flat rate VAT scheme themselves.

For example:

Happy Holidays are a limited company selling travel and holiday packages across the UK. The flat rate percentage applicable for Happy Holidays is 10.5%.

Happy Holidays turnover for 2015 is £100,000
On £120,000 the VAT payable would be £12,600

If Happy Holidays were to operate under the standard VAT scheme, they would pay £20,000 in output VAT on sales less any input VAT claimed. Unless Happy Holidays had purchases costs totaling £44,400 or more (inclusive of VAT) they would certainly be better off operating under the flat rate VAT scheme.

It is important to add that generally input VAT cannot be claimed on the flat rate VAT scheme, unless there are capital assets purchased costing more than £2,000 (inc. VAT). If input VAT is reclaimed on these assets, similarly it will need to be accounted for should the asset be sold, and this is to be at the standard rate as opposed to the flat rate percentage.

If you would like further information on the flat rate VAT scheme, or other VAT matters please contact me on 0800 8654330 or 07857 380805, via email to lauren@helloaccountancy.co.uk or visit our website www.helloaccountancy.co.uk