The VAT Flat Rate Scheme pays VAT to HMRC at a fixed percentage of the business’s annual turnover. Please continue reading to learn more about the VAT Flat Rate Scheme and how it impacts contractors.
What is the VAT Flat Rate Scheme?
The Flat Rate Scheme is an alternative way for small businesses to account for VAT. The scheme’s benefit is that it reduces the administrative burden on small businesses by allowing them to pay a fixed rate of VAT based on invoicing, simplifying their tax records. HMRC sets the rate according to the company’s main business activity – a complete list can be found on the government’s website. Although you charge clients the standard 20% VAT rate on all invoices, you will repay VAT at a fixed flat rate depending on your trade and business type.
Key aspects of the Flat Rate Scheme:
- You pay a fixed rate of VAT to HMRC
- You keep the difference between what you charge your customers and pay to HMRC
- To join the scheme your VAT turnover must be £150,000 or less (excluding VAT)
- You cannot reclaim the VAT on your purchases – except for certain capital assets over £2,000
Changes to the Flat Rate Scheme to be aware of
Before April 2017, contractors registered to the Flat Rate Scheme could benefit from extremely low VAT rates. However, HMRC believed there was widespread abuse of the Flat Rate Scheme and, from April 2017, implemented changes which affected businesses registered to the scheme on a low-cost basis. These entities were referred to as limited cost traders. You are defined as a limited cost trader/business if your goods cost less than:
- 2% of your turnover
- £1,000 a year (if your costs are more than 2%)
If a contractor is defined as a limited cost trader or business, the VAT bill is 16.5%. Please note, if you are in the first year of the Flat Rate Scheme, a further 1% discount still applies.
You must be eligible to join the scheme
You can join the VAT Flat Rate Scheme if you’re a VAT-registered business and expect your annual VAT taxable turnover to be £150,000 or less (excluding VAT) in the next 12 months. You must leave the scheme if:
- You’re no longer eligible for the scheme
- You expect your total income in the next 30 days alone to be more than £230,000 (including VAT)
- On the anniversary of joining the scheme, if your turnover in the last 12 months was more than £230,000 (including VAT) – or you expect it to be in the next 12 months
Are there any exceptions?
Yes – you are not able to use the scheme if any of the following apply:
- You left the scheme in the last 12 months
- You joined (or were eligible to join) a VAT group in the previous 24 months
- You committed a VAT offence in the previous 12 months
- Your business is closely associated with another business
- You’ve joined a margin or capital goods VAT scheme
- You registered for VAT as a business division in the last 24 months
How much VAT do I pay?
To calculate how much tax you pay, multiply your VAT flat rate by your ‘VAT inclusive turnover’. For example, you invoice a customer £1,000, adding VAT at 20% to make £1,200 in total. You’re a publisher, so the VAT flat rate for your business is 11%. Your flat rate payment will be 11% of £1,200 which is £132.
VAT inclusive turnover is different to the standard VAT turnover. VAT-inclusive turnover includes business income, for example, from sales and the VAT paid on that income. If you are unsure which rate applies to you or have questions about the Flat Rate VAT Scheme, please contact HMRC using their dedicated VAT helpline.
We have a range of accountancy services exclusively for contractors
Fusion Business Services provide compliant, high-quality accountancy services to contractors and businesses of all sizes. Whether you are a sole trader looking for an accountant or representing an SME – we have multiple accountancy services you could benefit from. To learn more about our accountancy services, please call our expert Sales Consultants on 0800 2294020 or complete the short form on our website.
