VAT Flat Rate Scheme – are you a winner or loser?

The VAT flat rate scheme was introduced by HMRC to help small businesses account for VAT more simply. However, it is not always the best route for every business.

How does the scheme work?

The flat rate scheme is available to businesses with a turnover of £150,000 per year or less and they can stay in the scheme until their turnover reaches £230,000 per year. When in the scheme, the business applies a flat rate percentage to its VAT inclusive sales each quarter and this is the amount of VAT payable to HMRC. The business cannot recover any input VAT – the flat rate percentage makes an allowance for that. The percentage to be paid varies according to the trade category of the business.

Should you use the scheme?

Businesses that decide to use the flat rate scheme should only do so after very careful comparison of their likely VAT position in the scheme compared to outside the scheme. Use actual projected sales and purchase figures to make the calculations and redo the calculations every time you submit a VAT return to check that you are not overpaying by being in the scheme.

The scheme is unlikely to benefit your business if:

  • A high proportion of your sales are zero-rated, exempt or to overseas customers – you will end up paying VAT on sales where no VAT has actually been charged to the customer
  • You incur input tax on purchases – under the scheme, you cannot recover this input VAT

As always, these rules are complex! Although HMRC has the discretion to allow a business to leave the scheme with effect from a date in the past; if you find that you are worse off in the scheme, they don’t often allow it earlier than the previous VAT period. So you need to keep on top of checking whether it is a good deal for your business or not.

If you are unsure if the Flat Rate Scheme is right for your business, we can help with our VAT health check. Please us on 01903 234094 for more information or advice.

A version of this blog originally appeared on the website of one of our MHA association member firms, MHA MacIntyre Hudson.