Flat Rate VAT Scheme
The VAT Flat Rate Scheme was introduced in 2002 to offer small businesses a simplified VAT accounting system. The scheme was initially unpopular, but following a modification in 2004 take up amongst small businesses is high.
A business can join the Flat Rate Scheme if its taxable turnover, or in the case of a new business its anticipated taxable turnover, is less than £150,000 per annum.
Under the scheme a business loses its right to claim back VAT on its purchases (except in the case of capital assets costing more than £2,000). In return it pays over less than it has charged on its supplies by applying a flat rate percentage to the VAT inclusive value of its supplies.
Different flat rates apply to different business activities. A full list of rates can be found on the HMRC website, but some examples are:
- Computer contractors (14.5%)
- Management consultants (14.0%)
- Retailing pharmaceuticals (8.0%)
Once in the Flat Rate Scheme you can remain in it until your tax inclusive turnover exceeds £230,000. You are also free to leave the scheme voluntarily at any time, but in this case you won’t be allowed to rejoin for 12 months.
An incentive is available to encourage businesses to join the Flat Rate Scheme at the time they first register for VAT. The incentive takes the form of a 1% discount for the first 12 months of registration.
An example of the operation of the Flat Rate Scheme is set out below:-
John is an IT consultant who uses a limited company which commenced trading on 1 July 2011. In the 12 months to 30 June 2012 his company turnover is £100,000 (net) and VAT on expenses amounts to £500. Under traditional VAT accounting, his output tax would be £20,000 (£100,000 x 20%) and so he would pay over £19,500 (£20,000 - £500).
If, however, he joined the Flat Rate Scheme, he would take the flat rate applying to computer contractors (14.5%), deduct the 1% incentive and apply this to his VAT inclusive turnover. This gives a payment of £16,200 (£120,000 x 13.5%), a saving of £3,300.