VAT flat rate scheme

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VAT flat rate scheme - structure and benefits

  • It may be beneficial to register for the VAT flat rate scheme.
  • If you are expecting turnover, excluding VAT, in the next year to be under £150,000.
  • This means that you keep the difference between 20% VAT charged and your flat rate.
  • Your flat rate can be 4% for food retailing to 14.5% for computer contractors depending on your trade or profession.
  • You invoice adding the normal 20% VAT.
  • You apply your flat rate to your sales including VAT, when completing your VAT return, and keep the difference.
  • Guidance - Check your flat rate here
  • There is an extra 1%, your flat rate is 1% less, in the first year.
  • The retained figure is added to your sales and is subject to either Corporation Tax or Income Tax, as applicable.
  • You claim no other VAT except when you buy business equipment, including commercial vehicles, costing more than £2,000 when you can claim back this VAT specifically.
  • Preparation of VAT forms is more simple.
  • You need to monitor whether it continues to be beneficial to stay in the scheme.
  • You need to come out of the scheme if your sales, excluding VAT, exceed £230,000 in a year including VAT, this is £191,667 excluding VAT.
  • Check all VAT theashold entry and exit levels in our Tax Tables Section 8 - VAT

Limited cost trader - Virtual exclusion from the cash benefits of the VAT flat rate scheme

  • From 1 April 2017
  • You are a Limited cost trader if:
  • You spend less than 2% of your VAT inclusive sales figure on goods (not services); or:
  • Less than £1,000 per annum on goods.
  • In an accounting year.
  • Goods calculation must exclude:
  • Capital equipment costs.
  • Motor running costs unless you are in a motor transport business.
  • As a Limited cost trader:
  • Your VAT flat rate is 16.5% on sales including VAT.
  • So if you invoice £1,000 + £200 VAT = £1,200.
  • You pay VAT £1,200 x 16.5% = £198.
  • And retain only £2 in VAT.
  • Which is 0.2% of your sales figure.
  • For example £200 VAT retained on sales of £100,000.
  • You still get the 1% first year reduction so you benefit by 1.4% of your sales figure in the first year after original VAT registration.
  • In the above example £14 on £1,000 sales, in the first year, instead of £2.
  • Your VAT return is still more simple in the VAT flat rate scheme.
  • But you may be better-off leaving the VAT flat rate scheme.
  • And claiming VAT on applicable business goods and services.

VAT flat rate scheme - drawbacks

  • The flat rate VAT is payable on all sales even when you cannot charge VAT including:
  • Zero rated exports outside EC.
  • Sales in EC to VAT registered customers when you cannot charge VAT.
  • Check European countries inside and outside EC.
  • Income where VAT does not apply such as:
  • residential lettings.
  • lottery commissions.
  • But not payable on:
  • VAT reverse charge on specified goods and services
  • Excluded from the Flat Rate Scheme.
  • VAT reverse charge supplies received and made should be accounted for under the reverse charge provisions.
  • Not investment income such as:
  • Interest.
  • Dividends.
  • Not supplies outside of the scope of UK VAT.
  • Not Services supplied outside the scope of VAT.

Outside the scope of UK VAT

  • "Outside the scope" is not the same as zero-rated.
  • The category Outside the scope of VAT is much more important where the VAT flat rate scheme applies or is being considered.

Leaving the VAT flat rate scheme

  • How to leave the VAT flat rate scheme - You can leave the VAT flat rate scheme at any time by:
  • Writing to HM Revenue & Customs.
  • Receiving back HMRC confirmation:
  • That you have left the scheme.
  • The date.
  • You must wait 12 months before you can rejoin the scheme.
  • You will still be registered for VAT.
  • VAT deregistration is subject to different criteria and application.
  • You must leave the VAT flat rate scheme if:
  • At any anniversary of joining the VAT flat rate scheme:
  • Your sales in the past year have exceed £230,000 including VAT.
  • Which is £191,667 excluding VAT at 20%.
  • Your sales in the next 30 days alone are expected to exceed £230,000 including VAT.
  • Other changes in VAT arrangements, talk to us or see guidance.
  • There is no form for leaving the VAT flat rate scheme.
  • You send a letter to:
  • HM Revenue and Customs
    Imperial House
    77 Victoria Street
    DN31 1DB

    This is a postal process; there is no online method.

Contact us if you wish to register or deregister for the VAT flat rate scheme or for general VAT and tax advice