Under the flat rate scheme, VAT-registered traders pay a fixed percentage of their VAT inclusive turnover to HMRC instead of the difference between the VAT that they charge and the VAT than they incur.
The flat rate percentage depends on the business sector within which the trader operates.
With the exception of certain capital assets costing more than £2,000, the trader cannot reclaim the VAT on purchases; the flat rate percentage includes an allowance for input VAT.
Joining The Scheme
Traders can apply to join the flat rate scheme if their turnover, excluding VAT, is £150,000 or less.
Traders can also choose to leave the scheme if they decide it is no longer for them.
Once a trader has left the scheme, they cannot rejoin it for at least 12 months.
Is the scheme still worthwhile?
The flat rate percentage for limited cost businesses is 16.5% of VAT-inclusive turnover.
This equates to 19.8% of VAT-exclusive turnover, which means that virtually all the VAT charged to customers is paid over to HMRC, with very little allowance to cover input VAT.
Leaving the Scheme
Once in the flat rate scheme, a trader must leave it if:
· on the anniversary of joining turnover in the last 12 months (including VAT) was more than £230,000;
· turnover in the next 30 days is expected to be more than £230,000 (including VAT);
·they become a tour operator and have to account for VAT using the Tour Operator’s Margin Scheme;
· the trader intends to buy capital goods covered by the Capital Goods Scheme;
· the trader becomes eligible to join an existing VAT group; or
· the trader becomes associated with another business.
A business is a limited cost business if the cost of its relevant goods is less than 2% of its turnover. However, the list of relevant goods excludes all service and fuel.
Consequently, a business that has significant expenditure on non- relevant goods, may not recover the associated input VAT in full.
In this situation, the trader may be better off using traditional VAT accounting and opt to leave the flat rate scheme voluntarily.
How do I leave the Scheme?
You can write to HMRC to apply to leave the scheme