The Flat Rate VAT Scheme is an incentive provided by the government to help simplify taxes. This means you can reclaim VAT on purchases that you have been charged on from HMRC.

Using the standard VAT accounting method means that every quarter you will be required to fill in a VAT return form. However, if you are eligible to join the Flat Rate VAT Scheme, you charge a standard rate of 20% on your invoices but pay HMRC a lower rate.

This amount can vary depending on your profession. The flat rates are set by HMRC and vary depending on the industry sector, from 4% to 14.5%.

Who can use the Flat Rate Scheme?

You can join the Flat Rate Scheme if:

  • you’re a VAT-registered business
  • you expect your VAT taxable turnover to be £150,000 or less (excluding VAT) in the next 12 months

You can’t use the scheme if:

  • you left the scheme in the last 12 months
  • you committed a VAT offence in the last 12 months, e.g. VAT evasion
  • you joined (or were eligible to join) a VAT group in the last 24 months
  • you registered for VAT as a business division in the last 24 months
  • your business is closely associated with another business
  • you’ve joined a margin or capital goods VAT scheme
  • You can’t use the scheme with the Cash Accounting Scheme. Instead, the Flat Rate Scheme has its own cash-based method for calculating the turnover

Leaving the scheme

You must leave the Flat Rate Scheme if:

  • you’re no longer eligible to be in it
  • on the anniversary of joining, your turnover in the last 12 months was more than £230,000 (including VAT) – or you expect it to be in the next 12 months
  • you expect your total income in the next 30 days alone to be more than £230,000 (including VAT)

What are the advantages of using the Flat Rate Scheme?

One good reason to use it is because it’s simpler. As an early stage start-up, you want to keep administration and bookkeeping duties as simple as possible.

When you use the Flat Rate Scheme, you ignore the VAT incurred on purchases when reporting VAT payable, except on any capital items which cost £2,000 or more. You simply multiply your gross turnover (including VAT charged at normal rates) by the FRS percentage in your sector.

If you don’t incur too many expenses and you’re in a sector with a low Flat Rate Scheme, you’ll end up paying less to HMRC than you would outside the sector. The advantages have been so great that many businesses have registered for VAT voluntarily before they reach that threshold.

Downsides of the Flat Rate Scheme to Be Aware of

Rental income is drawn into VAT:

The FRS captures both exempt income and zero-rated sales made by the business, but not income that is outside the scope of VAT – the latter would include many business-to-business services supplied to overseas customers.

For example, a customer is a sole trader hairdresser and is VAT registered, using the Flat Rate Scheme. She also lets out a residential property in her own name, which would normally be exempt from VAT as it is not holiday lettings. However, as the trade and the letting are both conducted by the same legal person the exempt rental income is subject to the Flat Rate Scheme percentage, so the customer must effectively pay over VAT on the gross value of her rental income.

If you have any queries regarding the Flat Rate Scheme do not hesitate to contact Amy, our Tax Manager, on amy@hbaccountants.co.uk