Usually, businesses submit VAT on their sales to HMRC after deducting the VAT they paid on their purchases. They must keep proper records of their input VAT and output VAT to show the exact amount of reclaiming VAT in their VAT return. However, for small businesses, the government has facilitated the submission of a fixed amount of tax under the Flat Rate VAT Scheme. This article will cover the important aspects of this scheme to help newcomers understand all the procedures of this tax scheme.

What is the Flat Rate VAT Scheme?

To join this Scheme, your company must be registered with HMRC. Secondly, the VAT turnover of your business should be £150,000 or less, excluding the Value Added Tax amount. You pay a fixed amount of tax from 4% to 14.5%, depending on what nature of the trade and business your company is involved in. After becoming a part of this scheme, you will not be entitled to reclaim VAT on your purchases except for capital assets exceeding £2,000.

Comparing Flat Rate Scheme with Standard VAT Rate

The standard VAT rate requires a lot of administrative work. You have to keep proper accounting records. It include VAT that you pay on your purchases and the VAT that you charge on your sales within a VAT accounting period. After proper calculation you can calculate the correct amount of VAT that you owe to HMRC or can reclaim from it through your VAT return.

On the other hand, no detailed bookkeeping or administrative work is required for a flat-rate tax scheme. You don’t need to keep records of the tax paid on purchases. Instead, you just have to pay a fixed rate of your turnover inclusive of the VAT you charged to HMRC.

For example, if your company is running an advertisement business and your turnover is £450,000, then @ 11%, you will pay £49,500 to HMRC.

How to Calculate Flat Rate VAT?

There are different flat rate percentages for different types of businesses. To join this scheme the annual turnover should be £150,000 or less, excluding the VAT that you will charge on your goods. The rate will be charged on the turnover inclusive of VAT. I’ll explain this with the following example.

You have an advertising business, and the flat rate is 11%. If a customer pays you £2,000 for your services and you charge VAT at 20% then your total turnover will be £2,000 + £400 = £2,400. Now you will pay the flat VAT rate on £2,400 at 11%, which will be £264.

In the first year of joining this scheme, you will get a 1% discount on the tax submitted. For a limited-cost business, the VAT rate is 16.5%. A business will be considered a limited-cost business if.

The cost of your goods is less than 2% of your turnover
The cost of your goods is more than 2% of your turnover but less than £1,000 a year

Advantages of Flat Rate VAT Scheme

Advantages

The biggest advantage of this Flat Rate Scheme is that it saves our time on record-keeping. We can use this time to monitor our business’s cash flow. We are not bound to keep a record of the VAT we charge on every sale and purchase, and we also don’t need to show VAT separately on our invoices.
There are a few rules that we have to follow under this scheme. As it does not involve the headache of keeping records on which purchases we can claim VAT, and on which we can’t. There are less chances of mistakes in VAT calculations to be shown in the VAT return. The applicant knows at which rate they have to charge and submit tax to HMRC.
In the first year of VAT registration under this scheme, you get a 1% discount on the flat rate percentage.
Applicants can reclaim VAT that they pay on their capital purchases over £2,000 and on all other purchases they made before joining this scheme.
It’s quite possible that you can make additional profit through this scheme. This is possible if you have paid less VAT on your purchases and you are charging higher tax on your sales by applying the flat rate.

Disadvantages

Some items that you sold are zero-rated or exempt from tax. Under this scheme, you have to pay tax even on such items to HMRC.
If you have paid higher VAT on your purchases than the tax you are submitting to HMRC by applying a flat rate, which is less than the amount you have already paid on your purchases, then you cannot claim a refund of such excessive tax that you paid on your purchases.

Eligibility for Flat VAT Scheme

Every business whose annual turnover is £150,000 or less excluding the VAT they will charge on their sales is eligible to join this scheme. When their turnover exceeds £230,000 including the VAT charged, then they will have to leave this scheme.

How to Apply for VAT Flat Rate Scheme?

You can join this scheme by filling the VAT600 FRS form and can send it to frsapplications.vrs@hmrc.gov.uk through email or post. You will mention the basic details of your business such as business name and address. You will also mention which flat rate will be for your business. For this you must identify the rate after careful consideration.

How to Decide if Flat VAT is Beneficial for You

Before applying for this scheme, you should calculate how much tax you paid to HMRC last year and how much you claimed on your purchases. If the tax amount calculated by applying the flat rate is less than the amount you have left after deducting the tax on your purchases from the tax you charged on your sales, then it means some portion of the VAT charged can be retained by you, and you will deposit less tax to HMRC.

FAQs

Which business can’t join the flat rate VAT scheme?

A business with an annual turnover including VAT more than £230,000 is ineligible for this scheme.

Are zero-rated and VAt-exempt products charged under this scheme?

Yes. All the zero-rated items and items exempted from VAT are charged with a flat rate.

Can HMRC challenge the flat rate of charging the VAT?

Yes. HMRC can object to the tax rate if it thinks that you have not applied the correct rate according to your business.

Conclusion

The Flat Rate VAT Scheme is beneficial for small businesses having turnover equal or less than £150,000 excluding the tax charged on their sold products. This scheme facilitates small businesses by freeing them from keeping all the records required under standard VAT rates. However, businesses should make careful calculations before applying for this scheme, as they cannot reclaim VAT as they would in the usual case. Moreover, if they are selling zero-rated or exempt products, they cannot charge tax to customers but still have to pay VAT on such items, which can be a loss for their businesses.

Flat Rate VAT Scheme- How to Calculate Flat Rate VAT?