If a business charges more VAT to customers than it pays on its own purchases, the difference must be paid to HMRC. Conversely, if a business pays more VAT than it charges, the difference can be reclaimed from HMRC. However, the VAT Flat Rate Scheme works differently – and this is what we will look at in this blog.
Value Added Tax (VAT) is charged by certain businesses on taxable supplies, such as the sales of goods and services. VAT-registered businesses must account for VAT on the full value of what they sell, and they can also reclaim any VAT they have paid on business-related goods and services.
Figures for VAT charged and paid must be reported to HM Revenue and Customs (HMRC) through the VAT return , normally submitted every three months.
As we have already discussed, the amount of VAT a business pays or reclaims from HMRC generally consists of the difference between the amount of VAT it charges to its customers or clients and the amount of VAT it pays on its own purchases (i.e. from suppliers, etc).
The VAT Flat Rate Scheme has different rules. Businesses registered on this scheme:
Businesses with a VAT taxable turnover (the total of everything sold that is not VAT exempt) that exceeds £90,000, known as the ‘VAT threshold,’ are obliged to register for VAT. They can voluntarily register for VAT if they do not meet the VAT threshold.
There is a separate threshold figure for the VAT Flat Rate Scheme of £150,000, which works differently.
Businesses can opt to join the scheme as long as their taxable turnover does not exceed the £150,000 threshold. To join, they should expect their VAT taxable turnover to be £150,000 or less (excluding VAT) over the next 12 months. If taxable turnover increases since joining the Flat Rate Scheme, they may be required to leave the scheme.
A business is obliged to leave the VAT Flat Rate Scheme if:
Businesses are not eligible to join the VAT Flat Rate Scheme if:
Furthermore, businesses cannot use the VAT Flat Rate Scheme with the Cash Accounting Scheme.
No business is required to join the VAT Flat Rate Scheme.
Although businesses which break the regular VAT threshold (£90,000) are legally required to register for VAT, they are under no obligation to even consider the Flat Rate Scheme.
Businesses can join the scheme online when they register for VAT. Alternatively, they can complete form VAT600FRS and email it to [email protected] (or send it by post to the address on the form).
If a business wants to join both the VAT Flat Rate Scheme and the Annual Accounting Scheme, they can apply using the form VAT600AA/FRS .
When a business wants to leave the scheme or is required to do so, it must write to HMRC.
There is a different flat rate for each type of business (e.g. 11% for the advertising sector compared to 13% for hairdressing or beauty industry services). For a full list of rates according to business type, see GOV.UK .
There is a discount of 1% on these fixed rates for businesses which are in their first year as a VAT-registered business.
A business is classed as ‘limited cost business’ if it spends (i), less than 2% of its annual turnover on goods or (ii), less than £1,000 if its total spend on goods is more than 2%.
Limited cost businesses are required to pay a higher flat rate of 16.5%.
The tax paid is calculated by multiplying the relevant flat rate percentage by the VAT inclusive turnover (i.e. the value of sales including VAT charged).
For example, a hairdresser who charges a total of £2,400 to her clients (i.e. £2,000 plus VAT at 20%) would multiply £2,400 by the flat rate which applies to hairdressers (13%). So the amount payable would be £312.