Overview of the VAT flat rate scheme for small businesses

Produced by Tolley

The following Value Added Tax guidance note Produced 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
  • Advantages
  • Disadvantages
  • Joining the scheme
  • Eligibility – what is included in the flat rate turnover
  • Calculating future turnover
  • Who cannot join the scheme
  • VAT groups
  • Businesses that are closely linked to other businesses
  • More...

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.

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

Advantages

These are the main advantages to using the scheme:

  1. 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

  2. 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

  3. if the scheme is used together with the annual accounting scheme it can make a significant difference to the cost of complying with VAT requirements

Disadvantages

The scheme will not benefit all businesses and the following should be considered when making a decision regarding whether or not to use the scheme:

  1. the business will need to calculate the VAT due and issue a VAT invoice to any VAT registered customers. Therefore if the majority of the business’ customers are VAT registered there may be little administrative benefit

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