The flat-rate scheme is aimed at making VAT simpler and more profitable for smaller businesses and start-ups.
Once you’re business is on the flat-rate scheme:
- you pay a fixed rate of VAT to HM Revenue & Customs (HMRC) – rates vary depending on your industry
- you keep the difference between what you charge your customers and pay to HMRC
- you can only reclaim VAT on the purchase of capital items where total value of the invoice is over £2,000 (including VAT) - you'll need to exclude any services on the invoice and make sure if you buy multiple items at the same time they appear on a single invoice
Because you get to keep the difference between what you collect in VAT (at the full rate of 20%) and what you pay to HMRC (14.5% if you’re something like an IT consultant), you actually make a small profit on being VAT registered.
That boost to your income is a great incentive for using the flat-rate scheme. If your VAT turnover comes under the required threshold, your accountant will be able to advise you if registering for the flat-rate scheme is the right move for your business.
To join the scheme, your VAT turnover must be £150k or under. There is an upper threshold, which is worked out by looking at your gross sales figures on the one-year anniversary of your business joining the scheme.
- If your gross sales DON’T exceed £230k, you can carry on in the flat-rate scheme. This is then reviewed again on the next one-year anniversary.
- If your gross sales DO exceed £230k, you must move to the standard VAT scheme at the end of the next quarter.
Accounting for the flat-rate scheme is pretty straightforward. You take your total growth income for the business, in a given time period (usually each quarter), and time that by the percentage that’s been set for your industry or sector.
As such, it makes the hassle of managing your VAT a lot simpler, with the additional benefit of bumping up your profits along the way.
NOTE: In the 2016 Autumn Statement, the Chancellor announced plans to change the VAT flat-rate scheme and to bring the rate for most businesses up to 16.5% on gross turnover (19.8% on gross turnover). This reduces the benefits of the scheme substantially for many businesses and came into play from April 2017 – if you have any questions, please get in touch with us.
If you’d like to check whether your business is eligible for the flat-rate scheme, give us a call on 01454 300 999, or drop an email to firstname.lastname@example.org