Guide to the VAT flat rate scheme
The VAT flat rate scheme is a simplified method to account for VAT charged to your clients. You only pay a fixed rate of VAT to HMRC and you keep the difference between what you charge your clients and pay to HMRC. You do not reclaim the VAT on your purchases, except for certain capital assets over £2,000.
How can I join the VAT flat rate scheme?
To join the scheme your VAT turnover must be below £150,000.
You also need to determine if you are a limited cost business before you can apply a fixed rate of VAT. Your business is a limited cost business if the amount you spend on relevant goods including VAT is either:
- less than 2% of your VAT flat rate turnover
- greater than 2% of your VAT flat rate turnover but less than £1,000 per year
What supplies CAN’T be accounted for in the scheme?
Here are some examples of supplies that aren’t relevant goods:
- accountancy fees, these are services
- advertising costs, these are services
- an item leased/hired to your business, this counts as services, as ownership will never transfer to your business
- goods not used exclusively for the purposes of your business, for example electricity to supply a home and an office located in the home
- food and drink for you or your staff, these are excluded goods
- fuel for a car this is excluded unless operating in the transport sector using your own, or a leased vehicle
- electronic devices, such as a laptop or mobile phone for use by the business, this is excluded as it is capital expenditure
- anything provided electronically, for example a downloaded magazine, these are services
- rent, this is a service
- software you download, this is a service
- software designed specifically for you (bespoke software), this is a service even if it is not supplied electronically
- goods which are bought solely to meet the test, as these would not be used exclusively for the purposes of your business. For example, if the quantity of goods being bought can’t reasonably be used by the business and are simply ‘stockpiled’ or thrown away, even if the business may normally use those items is smaller quantities such as office materials
- stamps and other postage costs, these are payments for services
What flat rate should I use?
If you are a limited cost business you should use the flat rate of 16.5%. You can use HMRC’s calculator to help.
Is there a tax rate reduction for new businesses?
Yes. If you’re in your first year of VAT registration you get a 1% reduction in flat rate percentage. This means you can take 1% off the flat rate you apply to your turnover, until the day before your first anniversary of becoming VAT registered. Note that the entitlement to apply the reduction runs for the 12 months following the date of registration for VAT and not the date you join the FRS.
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