With the flat rate VAT scheme:
- You pay a fixed rate of VAT based on your gross turnover – all business types are categorised and allocated a rate based on their type of work. You can see the rate applicable to your business by following this link: https://www.gov.uk/vat-flat-rate-scheme/vat-flat-rates
- You keep the difference between what you charge your customers and what you pay over to HMRC.
- You can’t reclaim the VAT on your costs any longer – except in certain cases for purchases of capital assets costing over £2,000.
The scheme was introduced to try and simplify VAT accounting for small businesses. You can only join the scheme if your turnover (excluding VAT) is less than £150,000 and you must leave the scheme if your VAT inclusive turnover exceeds £230,000.
Whilst introduced to simplify VAT for small businesses there is commercial advantage to be gained here in some cases. If the VAT you incur is less than typical for your business category then you can make money from the scheme. Additionally, if you are not required to register for VAT as your turnover is below the VAT registration threshold - advantage can be gained with a voluntary registration under this scheme.
We have clients that save several thousand pounds a year by registering on the flat rate VAT scheme. Could this benefit your business?