How to choose the appropriate flat rate percentage

By Tolley
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The following Value Added Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • How to choose the appropriate flat rate percentage
  • Choosing a business category
  • How to determine which flat rate to apply
  • 1% reduction for new businesses
  • Flat rate scheme percentage rates
  • Limited cost businesses
  • Changing the flat rate percentage
  • Annual review
  • Change in flat rate

Choosing a business category

There are a range of flat rate percentages that should be applied to different business activities. A business electing to use the flat rate scheme must determine which business sector best describes the type of business activity that will be undertaken for the next 12 months. Only one percentage can be applied to all sales made by a business using the scheme so it is important to choose the most appropriate business sector. If a business chooses the wrong business sector it may use the wrong percentage to calculate the VAT due on sales. This could lead to the imposition of penalties and / or interest charges by HMRC if it considers that the percentage is too low. Also if the business chooses a percentage that is too high then it will overpay VAT to HMRC which means less profits will be made by the business.

SI 1995/2518, reg 55K; FRS7000; Notice 733 

A list of the categories and their corresponding flat rate percentage rates can be found below.

See Example 1, Example 2 and Example 3.

How to determine which flat rate to apply

The following steps will enable the business or its adviser to determine which flat rate percentage that should be applied to the business activities in question:

StepAction requiredAdditional considerations
1

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