Flat Rate VAT

The flat rate VAT scheme was introduced in 2003, to ease the administrative burden for small businesses, by simplifying the process of completing their VAT returns. In most cases it can also actually create a “VAT profit”, particularly for personal service companies.

The flat rate VAT scheme is available to any business with annual taxable sales, excluding VAT, of £150,000 or below. Your annual taxable turnover includes standard, reduced and zero rated sales. Once you have joined the scheme you can remain in it until your total VAT-inclusive business income, at any anniversary of joining the scheme, exceeds £230,000.

The flat rate VAT scheme works by paying a fixed percentage (relevant to your trade) of your gross income to HMRC each VAT period. You are unable to reclaim any input VAT under the scheme, except where you purchase capital equipment costing over £2,000. In the first year of VAT registration under the scheme you are entitled to a 1% discount on your flat rate percentage.

The main pitfall of the scheme is that, in calculating your VAT liability, your gross income should include zero-rated and exempt supplies. This means that tax is being paid on income that VAT had not been charged on. If some of your income falls into these categories then the scheme is probably not for you.

If you are a business that has very few expenses to reclaim input VAT on, such as management consultancy, then the scheme could create a worthwhile VAT saving for you. By way of example, for a typical Management Consultancy business, with turnover of £80,000, annual savings under the scheme might be as much as £1,500 (+ another £1,000 in the first year of VAT registration).

Meeting with one of our partners or managers for a free initial consultation should be your starting point. This will enable you to explain your business to us and allow us to estimate any savings that would arise through registering under the VAT flat rate scheme.