For all but the tiniest businesses, correctly recording VAT is an essential component of operating a business. For this reason, you want to think about whether you could apply to join the VAT Flat Rate Scheme in order to simplify your life a little. Learn about the VAT Flat Rate Scheme, what VAT is, and whether your company qualifies for it by reading this ar
What is VAT?
Value-added tax, or VAT, is a tax that customers pay on the purchase of products and services. For instance, if a company registered for VAT charges £1 for a widget, they will charge the consumer £1.20 (presuming the 20% rate is applicable).
They will subsequently submit a VAT Return to the government, usually on a quarterly basis, containing the VAT they have collected.
VAT is applied to most company sales. This is the usual rate of 20%, but many things are additionally charged at a reduced rate of 5%, and there is even a zero rate. The latter isn’t the same as VAT-free because you still need to keep VAT records for any item that is zero-rated.Currently registered for VAT is £85,000. At that point, the company has to begin recording both the input VAT (amounts paid for purchases) and the output VAT (amounts charged on sales).
An explanation of the VAT Flat Rate Scheme
Since the 2002 Budget, small businesses, particularly smaller limited companies, have had access to the HMRC VAT Flat Rate Scheme. It’s a simplification meant to release small business owners from part of the paperwork associated with filing VAT returns.
As a proportion of your turnover, you pay a fixed rate of VAT rather than having to account for input and output VAT. This rate changes based on your actions. There’s also a higher flat rate of 16.5% for businesses considered to be limited cost traders. This was introduced to crack down on what the government felt were people abusing the plan. These companies have very little equivalent input VAT because they spent very little on goods. However, if you’d like your VAT accounting to be easier, you should still give it some thought.
Does my company qualify for the Flat Rate VAT Scheme?
Your company must be registered for VAT and anticipate having taxable turnover of £150,000 or less (VAT excluded) during the following twelve months in order to be eligible to participate in the VAT Flat Rate Scheme.
If your turnover in the previous 12 months (including VAT) was more than £230,000, or if you anticipate it will be in the upcoming 12 months, you are required to withdraw from the flat rate tax system on the anniversary of your membership.
Alternatively, if your company’s turnover (VAT excluded) is less than £85,000, you might want to terminate your VAT registration. The VAT Flat Rate Scheme may have lost some of its appeal to small enterprises after the higher flat rate of 16.5% was implemented in 2017.
But, if you choose to or are required to register for VAT, you should still carefully assess if enrolling in the plan would be a better option for you than the Standard VAT Accounting plan.
What is the impact of MTD on VAT on the flat rate scheme?
Many more firms might discover that they must use software to account for their VAT and maintain digital records of their VAT accounting as a result of Making Tax Digital for VAT. The making tax digital timeline has been a key factor in this shift, with businesses needing to adapt their processes to meet new requirements at various stages.
This is a fantastic chance to update your accounting and take advantage of the newest technological advancements. You may do more of what you enjoy, simplify life, and cut down on administrative work.
The goal of the flat rate plan is to make VAT accounting easier, and similarly, the MTD regulations for VAT are a little less complicated than those for regular VAT accounting. Less digital documentation is required of you. In particular, you are not required to maintain digital copies of:
- acquisitions, unless they are capital expenses for which you want to submit an input tax claim
- Relevant goods are used to assess if the restricted cost business rate has to be applied.
VAT Flat Rate Scheme vs. Standard VAT Accounting Scheme
Your company has to pay HMRC the 20% tax that it assessed on qualified sales during the preceding quarter, assuming that the normal rate of VAT is applied under the normal VAT Accounting Scheme.
However, you are also entitled to a refund of the VAT you pay on your purchases. Therefore, the difference between the VAT your company charges its clients and the VAT it pays on its own purchases is typically the amount of VAT that your company pays to HMRC or claims back.
By using the VAT Flat Rate Scheme, your company can keep the difference between what you charge your clients and what HMRC charges at a fixed rate of VAT.
Although limited cost businesses are restricted to a higher fixed rate of 16.5%, those businesses that don’t fall into the limited cost category can apply fixed VAT flat rates ranging from 4% to 14.5% to their gross turnover, including VAT, depending on the business sector or type.
An advertising agency would apply a fixed VAT flat rate of 11%, for example, with that figure falling to 9% for a textile manufacturer.
There are a number of other VAT schemes, such as the cash accounting scheme, that might be worth exploring too.
How to register for the VAT Flat Rate Scheme To participate in the
VAT Flat Rate Scheme, your business must be registered for VAT. You can apply by post, phone or email, but it is probably the easiest way to complete the online application form VAT600FRS. The following information is required to fill out the form:
- Company Name
- Business Address (you only need to mark whether it is in the UK)
- Telephone Number
- VAT Number
- Head Office Details Business Activities
- Percentage of Rate Used by Apartment. The date you would like to start using the
VAT flat rate system (HMRC will let you know this date, but you can choose a different date if you wish. You will need to mark the reason for the new date)
Apply by post You must download the form, complete it and send it to HM Revenue & Customs, National Registration Unit, Imperial House, 77 Victoria Street, Grimsby, DN31 1DB.
Final thoughts on the VAT flat rate regime
Ultimately, whether the VAT flat rate regime is right for your business will depend on:
- The types of sales and inputs that are subject to his VAT
- How quickly income can exceed the flat rate VAT limit
- Whether the company generates ‘exempt income’.
If you have access to an accountant, it can help you make the best decisions for your business situation.Check out this guide on how the UK Spring budget 2024 affects you.
