6 – VAT Flat rate scheme

Last Updated on 10 June 2020

Changes announced in the Chancellor’s 2016 autumn statement make the Flat Rate Scheme much less useful to a business that doesn’t buy physical ‘goods’ on a regular basis.

These changes, introduced from 1 April 2017, make the Flat Rate Scheme very unattractive for freelancers and consultants.

VAT rules may change substantially after Brexit.

How it works

  • Calculate your VAT as a percentage of your VAT-inclusive turnover
  • Available if your taxable turnover is less than £150,000 (excl VAT)
  • You have to apply to take part – but it’s very simple
  • You have to state your type of business for the correct flat rate to be applied
  • If you do lots of different types of work, work out where the bulk of your income comes from and use that single percentage for everything

Advantages

  • It’s relatively quick and easy – you don’t even need an accountant to do it for you
  • You can combine this with annual accounting
  • Flat rates are reduced by 1% for the first year of VAT registration
  • You can still claim VAT on most capital purchases costing £2,000
  • You effectively ignore all other “input tax” (i.e. VAT on business purchases)

Disadvantages

  • Doesn’t bring benefits if you have a lot of expenses that include VAT, as you can’t claim back all the individual bits of VAT at the actual amounts
  • Not much financial advantage to ‘limited cost traders’ since 1 April 2017

Here’s an example of how it works:
Imagine in one quarter you invoice:
£5,000 (net) + £1,000 (VAT @ 20%) = £6,000 (gross)

In the flat rate scheme you pay the percentage allowed for your type of business (e.g. 13%)

So…you pay the VAT people 13% of £6,000 = £780

The difference between £780 and £1,000 is £220. This feels a bit like ‘extra income’.

It is supposed to recompense you for the VAT you are not reclaiming individually on items you’ve bought.

Find out more:
www.gov.uk/vat-flat-rate-scheme

HMRC VAT Helpline: 0300 200 3700

Posted on 26 January 2020