VAT - What is the flat rate scheme?

The flat rate scheme was originally introduced to simplify the administration of VAT and is available to businesses with turnover of less than £150,000 a year.  Although it has been around a while now, it is worth re-visiting for those business who might not be taking advantage of the scheme.

The nature of trade determines which sector the business falls in, and a fixed percentage is then applied to turnover to calculate the amount of VAT payable, rather than calculating VAT on outputs and inputs.

While ever turnover doesn’t exceed £230,000 in one financial period, the business can remain within the flat rate scheme. However, if there is a one off increase rate in turnover, providing you informing the VATman why the increase occurred and give information to support your belief that next year your turnover will be less than £191,500 you will be able to remain within the scheme. For example, the increase could be the sale of an expensive piece of capital equipment.

Choosing your trade sector.

It is important to make sure you select the correct business sector, with the right flat rate percentage for your trade. If your business covers more than one business sector, care should be taken to make sure you chose the one applicable to the majority of turnover generated.  It is important to keep a close eye on your business activity and if the balance changes do not delay to change the category as soon as is possible, to avoid costly bills and penalties.

A good example of incorrect categorising, might be where a pub that joins  the flat rate scheme and selects the ‘public house’ category with a flat rate of 6.5%.  However, if the pub also served hot food, and the food sales were greater than the bar, the VAT man would deem decided the pub to be categorised within the ‘catering and restaurants’ sector with a flat rate of 12.5%,  leaving the pub with a rather large VAT bill to correct the position.

The flat rate scheme can save a business money and administration burdens.  However, it not always as straightforward as it may seem, and there are many pitfalls to watch out for.  Advice should always be sought to confirm the correct use and suitability of the scheme.  If you are in any doubt, please contact Brian Gooch, our VAT expert who will be able to assist.