Last updated Oct 14, 2024 and written by Aditi Mohan

The Flat Rate VAT Scheme Explained

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What is the Flat Rate VAT Scheme, and who can benefit from it?


If you are a business owner in the UK, you might be familiar with the concept of Value Added Tax (VAT). VAT is a tax on the value added to goods and services, as a business owner, you are required to register for VAT if your taxable turnover exceeds a certain threshold. 

While VAT can be a complex subject for many small businesses, the UK government has introduced the Flat Rate VAT Scheme as a way to simplify the process of VAT Return for small businesses. 

What is the Flat Rate VAT Scheme?

The Flat Rate VAT Scheme is an alternative way for small businesses to calculate and pay VAT to HMRC. Under this scheme, instead of calculating the VAT owed on every sale and purchase, you apply a fixed rate percentage to your gross turnover. The rate is determined by your business sector, i.e. photography or catering, and takes into account the average VAT incurred by businesses in your sector.

How does the Flat Rate VAT Scheme work?

To join the Flat Rate VAT Scheme your business must: 

  • Be VAT registered
  • Have an annual turnover below £150,000 per year (excluding VAT). 

Unlike other VAT services, you must apply to the flat rate scheme. It is recommended you speak with an accountant or professional before joining the scheme. You can use a formation agent to assist you with your application to the scheme.

You can not join the scheme if your business:

  • Has left the scheme within the last 12 months 
  • Has committed a VAT offence within the past year, such as VAT evasion
  • Are closely associated with (close financial or organisational ties) to another business. 
  • Has joined (or was eligible to join) a VAT group in the last 24 months 
  • You’ve joined a margin or capital goods VAT scheme

You also can not use the scheme with the Cash Accounting Scheme. 

Example of how the Flat Rate VAT Scheme works:

If you are a software developer and your sector rate is 10%, and your gross turnover for a quarter is £10,000, you would calculate your VAT as follows:

  • Gross turnover: £10,000
  • VAT at 20%: £2,000
  • Flat rate VAT at 10%: £1,000
  • Total VAT owed to HMRC: £1,000

As you can see from the example above, under the Flat Rate VAT Scheme, you pay a lower amount of VAT than the standard 20% rate. This is because the percentage you apply already takes into account the average VAT incurred by businesses in your sector.

It’s important to note that under the Flat Rate VAT Scheme, you cannot reclaim VAT on your purchases, except for certain capital assets over £2,000 (including VAT). This is because the fixed rate percentage you apply already includes the VAT you incur on your purchases.

Cons of the Flat Rate VAT Scheme

Your business may not benefit from the Flat Rate Scheme for a few reasons. Many service led businesses, such as contractors, spend little on goods. Therefore, VAT may not be a big expense for you. 

Secondly, if your business buys or sells goods from outside of the UK, such as a drop shipping business, the scheme will be more complex for you. 

 

Disclaimer: This blog is for general information about the Flat Rate VAT scheme, and is based on our understanding of the laws at time of writing. As tax laws are subject to revisions we recommend you consult a professional before making any tax related decisions or if you require any further information in the contents.