How does the Flat Rate VAT Scheme work?
The scheme is available to businesses who, when registering for flat rate VAT, expect to have a VAT exclusive turnover of £150,000 or less. Once a business joins the scheme it can remain on the scheme until the total business income in a year reaches £230,000.
If a business is not registered for the flat rate VAT scheme, the amount of VAT payable to HMRC will be the difference between VAT charged to customers, and VAT incurred on business costs and expenses. The business will be required to keep detailed VAT records, such as VAT receipts of all costs, and maintain a VAT account detailing the VAT amount for each transaction.
When using the flat rate VAT scheme the VAT charged to customers will remain the same, i.e. 20% in addition to the price of the goods or service being sold. But then instead of having to calculate VAT paid on costs, the business would simply pay a flat rate percentage of total sales in VAT to HMRC. The percentage payable varies depending on the type of trade being carried out by the business.
Businesses that are classed as limited cost traders, will pay VAT at a flat rate of 16.5%.
When registered on the flat rate scheme the business cannot reclaim VAT it pays in the course of buying goods or services unless it is VAT in relation to the purchase of a capital asset which has a VAT inclusive cost of £2,000 or more.
Because of the simplified nature of accounting for VAT, using the flat rate VAT scheme it can be useful and save time for small businesses.
