Could you save money by switching to the flat rate VAT scheme?

The amount of VAT a business pays or claims back from HM Revenue and Customs (HMRC) is usually the difference between the VAT charged by the business to customers and the VAT the business pays on their own purchases.

However, the flat rate scheme of VAT is often preferred by small businesses because in some instances it can reduce the amount of VAT that your business has to pay to HMRC and the process for calculating the amount due can be simpler.

Nicola Roby of CHW Small Business Accountants Bolton explains what the scheme is, looks at who is eligible how it could save your business time and money.

What is the flat rate scheme?

With the flat rate scheme:

  • you pay a fixed rate of VAT to HMRC
  • you keep the difference between what you charge your customers and pay to HMRC
  • you can’t reclaim the VAT on your purchases – except for certain capital assets over £2,000

Are you eligible to join the scheme?

You can join the flat rate scheme if:

  • you’re a VAT-registered business
  • you expect your VAT taxable turnover to be £150,000 or less (excluding VAT) in the next 12 months

You cannot use the scheme if:

  • you left the scheme in the last 12 months
  • you committed a VAT offence in the last 12 months, e.g. VAT evasion
  • you joined (or were eligible to join) a VAT group in the last 24 months
  • you registered for VAT as a business division in the last 24 months
  • your business is closely associated with another business
  • you’ve joined a margin or capital goods VAT scheme

You can’t use the scheme with the Cash Accounting Scheme. Instead, the flat rate scheme has its own cash-based method for calculating the turnover.

How do I join the scheme?

If you’re eligible, you can join the scheme:

  • online – when you register for VAT
  • by post – fill in VAT600 FRS and send it to the address on the form (or use VAT600 AA/FRS to apply for the Annual Accounting Scheme at the same time)

You’ll get confirmation you’ve joined the scheme through your VAT online account (or in the post if you don’t apply online).

Your accountant or tax advisor can guide you through this process if you are unsure.

How do I leave the scheme?

You can choose to leave the scheme at any time. You must leave though if you’re no longer eligible to be in it. To leave, simply write to HMRC and they will confirm your leaving date.

How could it save my small business time and/or money?

The VAT flat rate scheme may benefit many small businesses in terms of time and money. One intention behind the scheme is to simplify preparing a VAT return, thereby, saving small businesses time. Instead of accounting for all input and output VAT a set percentage rate is used to calculate VAT due from sales.

The percentage of tax paid under the scheme depends on the industry in which you operate.

You are still required to add VAT to all customer invoices but you do not need to record every item of VAT on sales or purchases in your actual accounts. The amount of VAT due is simply calculated as a ‘flat rate’ percentage of your sales including the VAT you have added.

As well as saving time the flat rate scheme can have financial benefits. Some businesses have very few purchases to reclaim the VAT from, so using a set percentage rather than calculating actual VAT due can mean the VAT you return is actually less than the amount invoiced.

Nicola says ‘The flat rate scheme is not suitable for all businesses. It will depend on the sector you operate within and it is advisable to seek professional advice to ascertain whether it would be beneficial for you.

‘However, it can be possible to increase your profit by using the scheme and indeed many small businesses prefer the simplified reporting and find it easier to calculate VAT due.’

If you are unsure whether to register for standard rate VAT or the flat rate scheme contact Nicola at CHW Small Business Accountants Bolton on 01204 534031 or via our contact us page.


This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.

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