The VAT Flat Rate Scheme lets a small business pay HMRC a fixed percentage of its VAT-inclusive turnover instead of working out the difference between the VAT it charges and the VAT it pays. The percentage depends on the type of business.
How it works
On the Flat Rate Scheme you still charge customers VAT at the normal rate, but you pay HMRC a flat percentage of your gross (VAT-inclusive) turnover and keep the difference. In return you cannot reclaim VAT on your purchases, except on capital assets costing £2,000 or more including VAT.
Who can use it
- You can join if you expect your VAT taxable turnover, excluding VAT, to be £150,000 or less in the next 12 months.
- You must leave if your total turnover including VAT goes over £230,000.
The rates
HMRC sets a percentage for each business sector. You get a 1% discount in your first year of VAT registration.
Heads up — a limited cost business, one that spends less than 2% of its turnover on goods or less than £1,000 a year, must use 16.5% whatever its sector.
Read more: VAT and Getting started with VAT.