The amount of VAT a business pays or claims back from HM Revenue and Customs (HMRC) is usually the difference between the VAT charged by the business to customers and the VAT the business pays on their own purchases. The VAT Flat Rate Scheme replaces this calculation, and businesses pay a set percentage of their sales (including the VAT charged to customers) to HMRC instead.
What is the VAT Flat Rate Scheme and how does it work?
If you use the Flat Rate Scheme, you charge VAT to your customers, and pay VAT to your suppliers when you buy goods or services from them in the normal way. However, when it comes to preparing your VAT return and paying VAT to HMRC you do things slightly differently.
With the Flat Rate Scheme:
- you pay a fixed rate of VAT to HMRC;
- you keep the difference between what you invoice your customers and pay to HMRC;
- you cannot reclaim the VAT on your purchases – except for certain capital assets over £2,000; and
- to join the scheme your VAT turnover must be £150,000 or less (excluding VAT), and you must apply to HMRC.
The main benefits of the scheme are:
- simplified record keeping, as HMRC say you do not have to keep detailed records of sales and invoices;
- fixed rate percentages that are lower than the standard rate; and
- it helps manage cash flow.
HMRC has launched a new online form for businesses to apply for the VAT flat rate scheme: Form VAT600FRS.
The Flat Rate Scheme isn’t the best choice for all businesses. Depending on your sector, you may find that you pay more VAT this way than through standard VAT accounting, so if you’d like to talk through and get all the information you need to make the right decision, get in touch.