Over the years, many of our clients have joined the Flat Rate VAT Scheme. For small Sole Traders and Limited Companies with an annual turnover below £150,000 it makes the quarterly VAT return much simpler.

And for many clients, it also results in less VAT to pay. As a reminder, here is how the scheme works:

  • Lets say you run a Bed & Breakfast with a turnover of £120,000pa

  • Your VAT Flat Rate will be 10.5%

  • You would apply 20% VAT on your customer invoices in the usual way

  • But you would only pay HMRC 10.5% VAT on your Gross income.

  • The VAT saving is possible when the actual VAT on all your purchases is less than 10.%%

  • In many instances over the years, clients have benefited by paying less VAT with the additional bonus of much less hassle and paperwork doing the quarterly VAT Return.

So for anyone with an annual turnover below £150,000 the Flat Rate VAT Scheme should be considered.

If your turnover in the first year is likely to exceed £150,000 you should not join the scheme. Also, if your turnover exceeds £230,000 you must leave the scheme.

An additional bonus is that HMRC are trying to incentivise small businesses to join the Flat Rate VAT Scheme by offering a 1% bonus in the first year of joining. Here is how it works:

There is a Flat VAT Rate for each trade. For instance, hairdressers pay 13%, pub landlords 6.5%, courier businesses 10.5% and IT consultants 14.5%.

In the first year of the business registration, these rates would be 1% less (i.e. for IT consultants 13.5% instead of 14.5%).

Click here to see a list of Rates for various industries

From April 2017 HMRC are introducing a new category called “Limited Cost Trader” with a Flat Rate of 16.5%.

This is for Sole Traders and Limited Companies where the VAT inclusive expenditure is less than 2% of their VAT inclusive turnover. For example:

  • Turnover (or Sales): £100,000 pa plus VAT = £120,000 (this would be the VAT inclusive turnover)
  • Expenditure: £1,950 plus VAT = £2,340 (this would be the VAT inclusive expenditure)

If the VAT inclusive expenditure is greater than 2%, it must also be above £1,000 pa in order to quality.

Unfortunately, the expenditure above does not include capital expenditure (a classic example would be a new laptop or a car).

Basically, because the Flat Rate VAT Scheme has offered some financial benefits, HMRC are tightening the rules and making the scheme less attractive for those businesses with very low expenditure.

Nevertheless, the scheme continues to offer some real cost savings as well as a much easier VAT return because it’s so much easier to apply a simple percentage (the Flat Rate) to the VAT inclusive turnover, rather than having to account for the VAT on every single expenditure.

Please speak to us if you would like to join the Flat Rate VAT Scheme.

And if you are already a member of the scheme, but are concerned how the new “Limited Cost Trader” might rules apply to you, give us a call.