Flat Rate VAT Scheme Guide​

Flat Rate VAT Scheme Guide​

Many businesses usually have a hard time completing their VAT returns; the process has been unusually long and complicated. But thanks to the Flat Rate VAT Scheme, you can now complete your VAT returns for your business in an easier and faster way.

Using the flat rate scheme rather than the traditional route could also save your business a significant amount of money.

What is the Flat Rate VAT Scheme?​

The Flat Rate VAT Scheme is a government incentive designed to assist freelancers, contractors, and businesses by simplifying the process of collecting and paying VAT to the government. Traditionally, you were required to account for VAT on each invoice.

FRS enables you to pay a single flat rate percentage on your entire turnover. You charge a standard 20% when invoicing but remit it to HM Revenue and Customs (HMRC) at a lower rate.

The repayment rate will vary depending on your industry. For instance, businesses in the accounting industry are required to pay just 14.5%. The rates can range from 4% to 14.5%. FRS not only simplifies the process but could also save you money since the rates are usually lower than standard rates.

Who can use the Flat Rate VAT Scheme?

If your business' annual turnover in the next year will be less than £150,000 before VAT, you can join the scheme. All you need to do is fill an application form by phone, email, post or online, and the HMRC will inform you in writing if your application is successful. An accountant can also do this for you.

You can apply when registering for VAT or at a later date. If you apply when registering for VAT, you can start using the scheme immediately.

Your flat rate turnover includes all supplies including VAT. It is essential to get the calculations right since including extra items means you pay too much VAT. Excluding items, on the other hand, could also attract penalties and interest after the HMRC makes an assessment.

Who cannot join the Flat Rate VAT Scheme?

• If your business is not registered for VAT

• If, when applying afresh, you had stopped using the scheme in the 12 months before your application date

• If you have been registered for VAT as a group or division within the past 24 months

• If you have been eligible to join an existing VAT group treatment within the past 24 months

• If your business is closely associated with another in the special manner described by the HMRC

• If you have been convicted or have accepted a compound penalty for a VAT related offense in the 12 months before your application

How do you determine your flat rate percentage?

The HMRC has a comprehensive list detailing percentage rates for different industries on their official website. The flat rate percentage you use will depend on which industry under which your business falls. Choose an industry that suits your business best.

If you make a mistake while choosing a sector, you will be paying more or less tax than required. Paying less means you could face unexpected VAT bills at a later date. HMRC is not going to change the sector you pick as long as the choice is reasonable.

Keep a record of the reason you chose a particular sector in case HMRC requires you to demonstrate you made a reasonable choice. Some businesses may fit into more than one sector; your current choice could be as reasonable as the next one.

As from April 1st, 2017, the flat rate percentage for a limited business was set at 16.5% regardless of the sector under which the business falls.

You are a limited cost business if your total purchases inclusive of VAT fall below 2% of the VAT flat rate turnover or are above 2% of the VAT flat rate turnover but don't exceed £1000 per year.

What are the advantages of using the Flat Rate VAT Scheme?

1. Your business can earn thousands of pounds as profit by using the scheme. The government offers this money since it is simpler for them to manage FRS and you are essentially collecting the tax on their behalf.

2. There's less paperwork to handle and a minimal level of admin is required for your business since you don't need to account for each individual transaction but rather your total quarterly turnover.

3. If your business is new and is registering for FRS for the first year, you get to enjoy an additional 1% discount on your overall percentage tax.

Are there any disadvantages of using the Flat Rate VAT Scheme?

The scheme may not be favorable to your business if you buy a lot of stock or have high rates of chargeable expenses. You will lose out on the VAT you could reclaim.

You should, therefore, compare the savings you are expected to make under the scheme to the amount of VAT you can claim back on your purchases before you can apply.

What you should know before applying for the Flat Rate VAT Scheme

If the annual turnover for your business is expected to be more than £150,000 in the next year, your business doesn't qualify to join the scheme. If, after joining the scheme, your annual turnover including VAT exceeds £230,000 in subsequent years, you are required to leave the scheme.

After joining the scheme, your company will not be able to reclaim VAT on any purchases or expenses.

But exceptions can be made on capital assets purchases exceeding £2,000. However, you can only reclaim VAT on capital expenses that appear on the same receipt. For instance, you can't claim back VAT on a capital asset this month and reclaim it for another asset the following month. They should all appear on the same receipt.

Just like in standard VAT, you will still need to fill a quarterly VAT return form. The only difference is you will pay a single flat rate percentage on your annual turnover rather than accounting for every single payment.

When calculating your flat rate turnover, you can leave out specific things such as non-business income, bank interest, and private income.