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VAT: The Flat Rate Accounting Scheme

VAT: The Flat Rate Accounting Scheme

VAT is generally acknowledged to be the UK's most complicated tax. For that reason, we regularly get clients asking us about how they can simplify the process. With that in mind, we thought we'd write a blog post about a VAT scheme that makes the calculations easier, reduces your workload and results in more assured VAT accounts.

What is the Flat Rate Scheme?

Many small businesses have to spend a considerable amount of time and energy trying to navigate the complexities of accounting for VAT. The Flat Rate Scheme is designed to address these time and resource problems and make it easier for many small firms to record VAT sales and purchases.

Under the Flat Rate Scheme, you don't have to calculate VAT on each transaction. Instead, you pay a flat rate percentage of their turnover.  This works by charging your customers the standard 20% rate of VAT, before deducting your flat rate from your gross invoice amount (invoice + VAT).

The flat rate you pay is dependent on what sector you operate in. Food retailers, for example, currently pay 4% while IT consultancy firms and legal service providers pay 14.5%. You can see a full breakdown of VAT flat rates here.

Who's eligible for the scheme?

At first glance, the eligibility criteria look fairly simple. All you need to do to join the scheme is to register for VAT and expect less than £150,000 in VAT taxable turnover in the next 12 months.

However, there is a fairly substantial list of exceptions. You won't be eligible for the scheme if:

·         you left the scheme in the last 12 months

·         you committed a VAT offence in the last year

·         you use a margin or capital goods VAT scheme

·         you joined a VAT group in the last 2 years

·         you were eligible to join a VAT group in the last 2 years

·         you registered for VAT as a business division in the last 2 years

·         you are closely associated with another business.

Although 9 out 10 businesses won't be affected by any of these exceptions, they are worth bearing in mind when making your application to the scheme.

Pros and cons

There are both advantages and disadvantages to using the Flat Rate Scheme if you're a small business.