Flat Rate Scheme, or standard VAT?
The Flat Rate Scheme can simplify your VAT and sometimes save money — but the limited-cost-trader 16.5% rate catches a lot of service businesses out. Put in your figures to compare what you'd pay HMRC each way, and check your turnover against the thresholds. A guide, not tax advice. Free, no sign-up.
Enter your VAT-taxable turnover for the last rolling 12 months (ex VAT). You must watch this every month, not just at your year end.
A guide, not tax or accountancy advice. The Flat Rate Scheme pays HMRC a fixed percentage of your VAT-inclusive turnover and you generally cannot reclaim input VAT (except capital assets over £2,000). The limited-cost-trader 16.5% rate applies if your VAT-inclusive spend on relevant goods is below the greater of 2% of your flat-rate turnover and £1,000 a year. You can join the scheme if your VAT-taxable turnover is £150,000 or less and must leave once total income exceeds £230,000. The VAT registration threshold is £90,000 and deregistration £88,000 (from April 2024). Sector rates change — always confirm yours on GOV.UK. Nothing you type here leaves your browser.
Simpler VAT, but not always cheaper.
What the Flat Rate Scheme does. You still charge your customers the normal 20% VAT. But instead of working out output VAT minus input VAT every quarter, you pay HMRC a single flat percentage of your VAT-inclusive turnover. The percentage depends on your trade sector and is meant to roughly account for the VAT you'd otherwise reclaim. It saves bookkeeping, and for some businesses it leaves a small surplus.
The limited-cost-trader trap. From April 2017, any business that spends very little on goods has to use a 16.5% flat rate, whatever their sector rate. 16.5% of your VAT-inclusive turnover is about 19.8% of your net sales — almost the entire 20% of VAT you charged. For consultants, agencies and other low-goods service businesses, the scheme then usually costs more than standard VAT. This calculator checks the test for you.
You can't reclaim input VAT. Under the flat rate scheme you give up reclaiming VAT on your costs (apart from a single capital asset purchase over £2,000 including VAT). If you buy a lot of standard-rated goods or services, standard VAT is often better because you get that input VAT back.
The first-year discount. For your first 12 months as a VAT-registered business you get a 1 percentage point reduction on your flat rate. After that it reverts to the normal sector rate.
The turnover figure is VAT-inclusive. One easy slip: the flat rate is applied to your gross, VAT-inclusive takings, not your net sales. So on a £100 net sale you charge £120, and the flat rate is worked out on the £120. This tool takes the net turnover you enter and grosses it up for you before applying the rate, so the figures match what you'd actually pay.
Cash accounting. The Flat Rate Scheme has its own built-in cash basis: you can account for the flat-rate VAT on the money you've actually received in the period, rather than on invoices you've raised but not yet been paid for. That helps cash flow if customers are slow to pay. (The standard VAT Cash Accounting Scheme is a separate thing and can't be combined with the flat rate, since the flat rate already has its own cash version.)
Joining and leaving. You can apply to join if your VAT-taxable turnover is £150,000 or less (excluding VAT). You must leave the scheme once your total business income is more than £230,000. Separately, you must register for VAT at all once your rolling 12-month turnover passes £90,000, and you can ask to deregister if it falls below £88,000.
Run the numbers, then keep them straight.
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