The flat rate scheme is very popular with small businesses and could benefit your business. Here is everything you need to know about it.
What is Flat Rate Scheme and who can join it?
The Flat Rate Scheme is designed to simply record keeping for small business and allows them to apply a fixed percentage to your gross turnover to arrive at the VAT liability.
A business can join the flat rate scheme if its gross taxable turnover including all standard, reduced and zero rated (excluding VAT) it below £150,000.
You are still required to charge VAT in the normal way but would pay a reduced fixed percentage over the HMRC based on your business sector. You cannot reclaim VAT on your purchases unless you purchase capital assets which are over £2,000
One a small business has joined the scheme it can continue to use it until its total income is more than £230,000 (including VAT)
You cannot join the Flat Rate Scheme if;
- you have left the scheme in the last 12 months.
- You registered for VAT as a business division in the last 24 months.
- You use one of the Margin Schemes for second-hand goods, art, antiques and collectibles, the Tour Operators’ Margin Scheme, or the Capital Goods Scheme.
- You have been convicted of a VAT offence or charged a penalty for VAT evasion in the last year.
- Your business is closely associated with another business.
An Example of how to calculate your VAT liability on the Flat Rate Scheme
As an example of how the scheme works let’s look at a catering company with £100,000 of net Vatable turnover. VAT calculation would be as follows;
Sales £100,000 + VAT @ 20% £20,000 = £120,000
VAT payable = £120,000 gross income x 12.5% = £15,000 payable to HMRC
As a catering company is unable to reclaim VAT on most its purchases by using the Flat Rate Scheme there may be a financial saving as the percentage of turnover paid over to HMRC is lower than that the VAT 20% it would charge customers.
What are benefits to a small business?
There are several benefits to using the Flat Rate Scheme;
- Reduced record keeping and simplified VAT calculations
- 1% discount on the percentage applied for newly VAT registered businesses in the first year of using the scheme
- For those small businesses in certain sectors such as catering or consultancy where they have little or no VAT to reclaim on purchases they will also benefit from the cash advantage of apply a percentage less than 20%. Such as for example 14.5% for IT consultancy services
Flat rate percentages
Detailed below is a list of the Flat Percentages applicable under the Scheme;
|Type of business||Current VAT flat rate (%)|
|Accountancy or book-keeping||14.5|
|Any other activity not listed elsewhere||12|
|Architect, civil and structural engineer or surveyor||14.5|
|Boarding or care of animals||12|
|Business services not listed elsewhere||12|
|Catering services including restaurants and takeaways||12.5|
|Computer and IT consultancy or data processing||14.5|
|Computer repair services||10.5|
|Entertainment or journalism||12.5|
|Estate agency or property management services||12|
|Farming or agriculture not listed elsewhere||6.5|
|Film, radio, television or video production||13|
|Forestry or fishing||10.5|
|General building or construction services*||9.5|
|Hairdressing or other beauty treatment services||13|
|Hiring or renting goods||9.5|
|Hotel or accommodation||10.5|
|Investigation or security||12|
|Labour-only building or construction services*||14.5|
|Laundry or dry-cleaning services||12|
|Lawyer or legal services||14.5|
|Library, archive, museum or other cultural activity||9.5|
|Manufacturing fabricated metal products||10.5|
|Manufacturing not listed elsewhere||9.5|
|Manufacturing yarn, textiles or clothing||9|
|Mining or quarrying||10|
|Real estate activity not listed elsewhere||14|
|Repairing personal or household goods||10|
|Retailing food, confectionery, tobacco, newspapers or children’s clothing||4|
|Retailing pharmaceuticals, medical goods, cosmetics or toiletries||8|
|Retailing not listed elsewhere||7.5|
|Retailing vehicles or fuel||6.5|
|Sport or recreation||8.5|
|Transport or storage, including couriers, freight, removals and taxis||10|
|Wholesaling agricultural products||8|
|Wholesaling not listed elsewhere||8.5|
If you think the Flat Rate Scheme could suit your business and need some advice contact for a free initial meeting;
Telephone: (01424) 211141