Overview of the VAT flat rate scheme for small businesses

By Tolley

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

  • Overview of the VAT flat rate scheme for small businesses
  • Main advantages and disadvantages of the scheme
  • Joining the scheme
  • Applying for the scheme
  • How to fill in the application form
  • Special sectors
  • Claiming VAT bad debt relief
  • Books and records
  • Interaction with direct taxes
  • Appeals
  • Next steps

The flat rate scheme was introduced by HMRC to simplify VAT accounting for small businesses. Businesses using the scheme will apply a single VAT percentage to the businesses' relevant turnover during the period. The flat rate scheme is intended to reduce the administrative burden on small businesses because they are not required to record the VAT on sales and purchases in their accounting records.

2006/112/EC , Article 281; VATA 1994, s 26B; SI 1995/2518, regs 55A–55V; VAT Notice 733 ; De Voil Indirect Tax Service V2.199B–V2.199D (subscription sensitive)

The main point to note is the fact that businesses using the scheme will charge VAT at the applicable rate on all sales made but this is not paid to HMRC. The business cannot recover any VAT incurred on costs, unless the goods are capital expenditure items costing at least £2,000 including VAT. The business will apply the fixed rate percentage to the gross sales turnover and this amount is paid to HMRC as output VAT.

The main rules regarding the application of the scheme are outlined below.

Main advantages and disadvantages of the scheme

These are the main advantages to using the scheme:

  • it is much simpler to complete the VAT return as a flat percentage is applied to the turnover in order to calculate the amount of output tax due. The business will also reduce the amount of time spent recording VAT on sales and purchases
  • businesses cannot recover VAT incurred on items of expenditure, with the exception of certain capital items, so they do not need to determine whether VAT is recoverable on the purchase
  • if the scheme is used together with the annual accounting scheme it can make a significant difference to the cost

More on Flat rate scheme: