Along with various other VAT schemes, some companies that meet eligibility criteria can take advantage of the government Flat Rate VAT scheme. This allows smaller businesses or those with an annual turnover below certain limits to take advantage of simplified VAT calculations for their business.
This scheme allows companies to pay a fixed rate of VAT and keep the difference between the VAT paid by customers and the amount paid to the HMRC, giving companies a financial gain in many cases.
This additional financial bonus makes the Flat Rate Scheme appealing to many companies. Along with being a simplified method of calculating the VAT on sales and invoices it allows companies to plan better for their VAT payment.
How do I join the Flat Rate Scheme?
Assuming that your company is VAT registered – meaning that the annual turnover is above £85,000 you can register for the Flat Rate Scheme on the HMRC website, by email, or by post. Participation in the scheme is completely optional and companies may choose to leave at any time.
There are some restrictions to joining and your business will not be eligible if:
- Turnover exceeds £150,000
- You have left the scheme in the past 12 months
- You have committed a VAT offence
Does it matter what type of business I run?
Generally speaking the VAT Flat Rate scheme is open to all businesses no matter what the industry. Everything from accounting companies, to computer repair, to travel agencies are able to participate in th scheme.
However, the nature of your business will affect the level of VAT you are expected to pay. This can be beneficial for certain business types. In the case of catering businesses such as restaurants and pubs, or those providing accommodation, the flat rate has been reduced to as low as 0% in some instances.
Other companies will pay amounts between 1% and 16.5% depending on the business type.
Can the Flat Rate Scheme be combined with other Schemes?
As there are a number of government schemes and initiatives it can be helpful to know which may be used in combination with the flat rate scheme. Companies that use the popular Cash Accounting method should be aware that this may not be used in conjunction with the Flat Rate VAT Scheme.
The HMRC provides its own method of cash-based accounting which must be used by companies using the Flat Rate Scheme to make VAT calculations. Businesses that use the Annual Accounting method will still be permitted to use this together with the Flat Rate Scheme.
Other schemes such as the Retail Scheme and the Margin Scheme may not be used with the Flat Rate Scheme.
How do I calculate Flat Rate VAT?
Companies that elect to use the Flat Rate Scheme for VAT payments will need to calculate their contribution. Depending on the type of business the rate will need to be determined. Rates for different businesses can be viewed on the HMRC website and we have included a link to the information.
VAT payments can be calculated by selecting your company type from the sheet and using the rate to make your calculation.
VAT for goods and services is charged at a standard 20%, so a flat rate calculation for a company that repairs computers would look like this.
Sales price £300 + 20% VAT = £360
The flat rate VAT for a Computer Repair business is 10.5%
So your flat rate VAT payable will be –
£360 x 10.5% = £37.80
This means that while the VAT charged to the customer is £60, the amount paid by the business is £37.80, effectively gaining an extra £22.20 for the company.
