The Flat Rate Scheme is run by HM Revenue & Customs (HMRC). It allows a VAT registered business to pay a fixed percentage of its turnover to HMRC every 3 months. The scheme is only open to business with a turnover of less than £150,000 per year. It is designed to make sure a business pays the same amount of VAT without having to complete endless paperwork.
Who can use the Flat Rate Scheme?
Any business that meets the conditions set down by HMRC is eligible to apply for the scheme. Businesses can choose to leave the scheme at any point. There are certain businesses which cannot join the Flat Rate Scheme. These include:
Business which have committed an offence (such as VAT evasion) within the past year.
Business which left the scheme in the last 12 months.
Business with close links to another business or organisation
If after signing up, a business annual turnover exceeds £230,000 of taxable revenue, they must leave the scheme.
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How much will a business pay under the Flat Rate Scheme?
Every registered business can calculate their tax by multiplying their VAT flat rate by their taxable turnover. So if a business has a turnover of £50,000 and a flat rate of 10%, they would pay £5,000.
Even though there is a reduced amount of paperwork, it is important that each business keep all receipts from purchases made. Any new business using the Flat Rate Scheme in their first year, get another decrease of 1% in their yearly tax percentage.
How much do ‘Limited Cost’ businesses pay?
Introduced in April 2017, any business which spends less than £1,000 per year on goods is considered a ‘limited cost business’. These businesses must pay a higher VAT flat rate of 16.5%.
A number of items are not covered under the scheme. These include:
Food and drink for the business and its staff
Company vehicles and fuel
Capital expenditure
What do other business types pay?
If a business is not considered a ‘limited cost business’, their rate will depend on the type of business that it is. Under the scheme, each industry has a different flat rate. These rates can vary widely from low to high. Examples of these are outlined below.
Flat Rate |
Types of Industries |
4% |
Food, confectionary, newspapers, tobacco, children’s clothing |
14.5% |
Bookkeepers, accountants, IT consultants, architects, structural engineers, surveyors, civil engineers, computer technicians, data processing businesses, construction services, legal services |
How to apply for the Flat Rate Scheme
Any business that registers for the VAT Flat Rate Scheme will enjoy great benefits such as a reduced administrative burden. Some other benefits include:
Lower fixed rate than the standard rate
Fewer rules and regulations to follow
Simplified record keeping
Financial certainty for registered businesses