The flat rate scheme for VAT is a simple scheme that can help save time and work for business owners. Instead of subtracting your input VAT from your output VAT to figure out how much VAT you need to pay HMRC, you pay a fixed percentage of your VAT-inclusive turnover. The proportion varies depending on your industry. So, is the VAT Flat Rate Scheme worthwhile?
Who is eligible to participate?
You must be a VAT-registered business with a VAT taxable turnover of £150,000 or less to be eligible for the VAT flat rate scheme. This is the sum of everything you sell that isn’t VAT-free, except VAT. If you left the plan during the previous 12 months, you will not be able to re-join.
If your turnover in the previous 12 months, including VAT, was more than £230,000, or if you estimate your turnover in the next 30 days to be more than £230,000, you must quit the scheme (including VAT).
Calculating your VAT
The proportion you pay as a flat fee is determined by the nature of your company. On the Government website you will be able to find the percentages that apply to various company sectors. The percentages are lower than the rate of VAT charged and allow for input VAT recovery.
For the first year of enrolment in the scheme, you will get a 1% reduction on your flat-rate percentage.
The fixed rate percentage applied to your VAT-inclusive turnover is the VAT you must pay to HMRC for a quarter.
So, is the VAT Flat Rate Scheme worthwhile?
The scheme will save you time, but it will cost you money if the amount you would pay under normal circumstances is less than the amount calculated using the fixed rate %. There’s no replacement for doing the math.
The flat rate percentage of 16.5% of VAT-inclusive turnover for businesses with low costs is equal to 19.8% of net turnover. This doesn’t leave much room for input VAT recovery, since 99% of the VAT charged at 20% must be paid to HMRC.
This could be a problem for a business that doesn’t spend much on goods but pays VAT on services and things like fuel and promotional items that aren’t included in the calculation.
Again, the only way to figure out if the scheme is worth it is to do the math.