VAT flat rate scheme – what do I pay?
12th April 2018
Everyone reaches a crossroads at some time in their life, and it’s no different for small business owners when it comes to choosing how they will pay VAT to HMRC.
The first option when you register for VAT is to stick with the standard rate of 20% on all goods or services you buy and sell in a tax year.
The alternative is to opt for the flat rate scheme, in which you’ll pay VAT depending on the type of industry your business operates in so long as your annual taxable turnover is less than £150,000.
While the flat rate scheme sounds relatively simple to understand, to many business owners it’s a riddle wrapped in a mystery inside an enigma.
Philip Hammond further muddied the waters, with the introduction of the ‘limited cost trader’ flat rate of 16.5% – higher than all other trades on HMRC’s flat rate list.
How does the VAT flat rate scheme work?
The flat rate scheme doesn’t change the way you charge VAT to your clients and pay VAT to your suppliers. That carries on as normal.
Instead of adding the VAT you’ve charged and subtracting it from the VAT you can reclaim, the flat rate scheme requires you need to calculate a percentage of sales.
To do this, you add up all your sales (omitting the sales outside the scope of VAT), including any VAT charged to your customers.
Then you need to times this by the flat rate of VAT for your business, which depends on what type of business it is. A full list can viewed here. The percentage is the VAT owed to HMRC.
For instance, you own a clothes shop and the flat rate percentage is 7.5%. You sell 100 suits for £12,000 (including VAT of £2,000) and pay a flat rate of £900 (£12,000 x 7.5%) to the Revenue.
If the total cost of the goods you bought is less than 2% of your taxable turnover, or less than £1,000, you will be classed as a limited cost trader and a flat rate of 16.5% will apply.
Regardless of your trade, you will be eligible for a 1% discount if it’s your first year as a VAT-registered business.
Is the VAT flat rate scheme right for you?
Whether or not the VAT flat rate scheme is right for you really depends on whether you’re classed as a limited cost trader or you fall into one of the businesses on HMRC’s list.
Businesses classed as limited cost traders may be worse off paying 16.5%, and it’s worth seeking expert advice to weigh up the pros and cons of the flat rate scheme before joining or leaving it.
Contact our team of experts on 0117 305 2600 or email firstname.lastname@example.org for a VAT health check or to guide you on the flat rate scheme.