The Flat Rate Scheme for small businesses

VAT can be a daunting task, fortunately the HMRC offers a number of VAT schemes designed to make filling your VAT return easier. The Flat Rate Scheme provides a good option for small businesses and contractors who turnover less than 150,000 net, and are able to convert sales into profit.

How does the Flat Rate Scheme work?

The Flat Rate Scheme simplifies VAT returns by paying a predetermined percentage of sales to HMRC without having to calculate the difference between sales input, and purchases output. The predetermined percentage is defined by business sector. Below is a link to the HMRC site with a full list of the business sector rates, and a selection of business sector rates that might apply to you:

Computer and IT consultancy or data processing 14.5%
Advertising 11%

Flat Rate Scheme percentage rates:
https://www.gov.uk/vat-flat-rate-scheme

First year discount

For the first year of being registered for VAT the HMRC offers a 1% discount from your standard business sector rate. So a Computer / IT consultant would use 13.5% for the first year, following which it would increase to 14.5%.

I am VAT registered already, should I move to Flat Rate Scheme?

In order to establish if you should move there is a simple calculation you can perform:

Step 1)
Take your gross sales for your previous VAT quarter and multiply it by your appropriate business sector rate (based on industry rates above).

Step 2)
Compare the result to box 5 on your previous VAT return.

Step 3)
If your total is less, then you would have saved money using Flat Rate Scheme in that VAT quarter.

Claiming back VAT under the Flat Rate Scheme

Under the Flat Rate Scheme you typically cannot claim back the VAT you spend on capital assets for your business. However, you may be able to claim back the VAT on certain capital asset purchases with a VAT inclusive price of £2,000 or more.

I should not apply if…

You mostly buy items which contain VAT at the standard rate of 20%. As a rule you cannot reclaim the VAT back on your purchases.

You predominantly make zero-rated or VAT exempt sales.

How do I apply?

You can apply for the Flat Rate Scheme with form "VAT 600", which is available from HMRC website (www.hmrc.gov.uk), search for "vat 600".

To download the form in a PDF format, please click here.