Flat rate scheme

This scheme is designed to reduce the cost of complying with VAT obligations by simplifying the way small businesses calculate their VAT. It is available to businesses who expect their VAT exclusive turnover in the next 12 months to be no more than £150,000 in taxable supplies.

Taxable supplies are calculated by looking at the total of supplies at the positive and zero rates, excluding VAT and the value of any capital assets expected to be sold. Total business income includes taxable supplies and the value of exempt and other non-taxable income.

A business must leave the scheme arises when turnover increases to £225,000

The flat rate scheme saves time by removing the need to calculate and record output tax and input tax in calculating the net VAT due to HM Revenue & Customs. The VAT in a period is calculated by applying the flat rate percentage to the tax inclusive turnover for the period. However, the flat rate rate scheme can cost extra VAT if you make supplies which are exempt from VAT as flat rate VAT will be payable on the value of all supplies made, including exempt supplies.

HM Revenue & Customs has published a table showing rates applicable to many business sectors. Some examples are:

Retail of food, newspapers, confectionery 2
Retail of vehicles or fuel 5.5
Photography 8.5
Estate agency 9.5
Hairdressing 10.5
Legal services 12
Computer and IT consultancy 11.5
The flat rate to be used depends on which trade sector most accurately reflects any particular business. If a business includes supplies in two or more sectors, the percentage to be used is that appropriate to the main business activity as measured by expected turnover in the year ahead.

If you are making supplies to other VAT registered businesses, you give them a VAT invoice charging VAT at the normal rate for the supply (not the flat rate percentage).

Most traders with qualifying turnover are eligible to join the scheme, but there are a number of exclusions designed to prevent abuse of the scheme as well as a few to avoid complex interaction with other schemes. The scheme is optional, but traders wishing to join should complete Form VAT 600 (FRS) (which can be printed off the HMRC website at www.hmrc.gov.uk).