VAT FLAT RATE SCHEME – A Simple Guide

WHAT IS IT?

It is a simplified VAT scheme that allows businesses (with £150,000 turnover or less) to charge standard VAT on sales but pay over a reduced amount to HM Revenue and Customs (HMRC).

To illustrate (let’s ignore purchases for simplicity):

Standard VAT business
Net Sales £100
Standard VAT 20% £20
Gross Sales £120

On VAT Return:
Sales excluding VAT £100
VAT due to HMRC £20

Now, let’s have a look at a business using the flat rate scheme:

Flat Rate Scheme VAT business (using 14.5%*)
Net Sales £100
Standard VAT 20% £20
Gross Sales £120

On VAT Return:
Sales including Standard VAT £120
VAT due to HMRC = 14.5% of £120 = £17.40

The above examples show that on the same turnover, a business using the flat rate scheme will pay £2.60 less than a standard rate business to HMRC.

(*This varies depending on the business sector. Check yours here)

WHAT’S THE CATCH?

Businesses using the flat rate do not recover VAT suffered on purchases though VAT suffered on bought capital items exceeding £2000 may be reclaimed.

It therefore goes without saying that businesses that purchase a lot of VATable items will not benefit from using the flat rate scheme which is why it is very well suited to the consultancy/service industry.

FILLING OUT THE VAT RETURN – some differences

Box 6
It is really important to note that BOX 6 on the VAT return form must contain the sales figure INCLUDING the VAT charged. This is different for businesses using the standard rate as the sales figures here excludes the VAT.

Box 7
The total purchases box should be nil unless a single purchases of capital items costing more than £2000 is made or goods were acquired from another EC country.

FILLING OUT OTHER TAX RETURNS

Ignoring Purchases and using some of the figures above, the flat rate business’ taxable income will be:

Turnover (Gross Sales) £120.00
Less Expenses:
Flat rate scheme VAT £17.60
Taxable Income £102.40

Compare this to the standard rate business’ taxable income:

Turnover (Net Sales) £100
Taxable Income £100

As you can see, the taxable income of the flat rate business includes the little profit made from using the flat rate scheme on which income or corporation tax will now be due. Remember that this calculation ignores purchases.

Taking the above slightly further to check which business fares better after tax (assume a tax rate of 20% and still ignoring purchases):

Flat rate business:
Taxable income = £102.40
Tax payable = £20.48
After Tax Income = £81.92

Standard rate business:
Taxable income = £100
Tax payable = £20
After Tax Income = £80

From the above, the flat rate scheme business has clearly made a little killing. The question is, will this work out the same if purchases are taken into account?

JOINING THE SCHEME

It’s really easy to join the scheme but do speak to your accountant before you make up your mind. Obviously, if you have already decided to go for it, do one of the following:

1. Register online
2. Download the form VAT600FRS and either post it or return via email to frsapplications.vrs@hmrc.gsi.gov.uk