Interested in Flat Rate VAT Scheme? Learn If It Is Right for Your Business

There are several special VAT accounting schemes available for business operating in the EU, the UK and other countries. Depending on the country of residence, size and type of the company, preferred VAT accounting schemes can range from standard accounting, output VAT on profit margin to exemption schemes or flat rate VAT, covered in this text.

What is a flat rate VAT scheme?

Most prevalent in the UK, flat rate VAT is an accounting scheme best suited for small enterprises. To enrol in the plan businesses must have a turnover lower than a particular limit, set by the country‘s taxation authorities.

Utilizing the VAT flat rate scheme allows businesses to pay a lower percentage of VAT and removes the burden of filling in the standard VAT returns. When taking part in this scheme business charge and pay VAT like any other taxpayers. However, when submitting VAT returns to tax authorities, instead of paying or receiving the VAT difference, these businesses add up all sales (called the VAT inclusive turnover) and multiply them by the VAT flat rate.

This method of accounting removes some of the administrative burdens for small enterprises and helps to simplify the bookkeeping. It is not supposed to reduce the tax burden. However, it can help save money for business in some sectors.

Flat rate VAT threshold and the limitations of the scheme

Similar to standard VAT accounting, VAT flat rate scheme can be adopted when the turnover of your business passes a particular threshold. However, a company can only use the flat rate VAT scheme up to the turnover ceiling, which ensures that the program is used by small enterprises only. 

Businesses in the UK registering to enrol in the scheme must expect the taxable turnover to be less than £150,000. Already enlisted firms fall out of the scheme once the VAT inclusive turnover hits £230,000 in the last 12 months.

Determining the flat rate VAT for your business

Flat rate VAT in the UK and other countries where the scheme is adopted varies across industries. For example, legal experts in the UK would pay 14.5% VAT rate and medical goods retailers would pay 8% VAT.

Flat rate tax, paired with VAT exemption, is also available in some of the EU member states for agricultural, forestry and fisheries businesses. Such businesses can charge a flat rate fee from their customers and retain it as a compensation of the VAT they cannot return. At the same time, clients of these businesses can return the fee through their own tax returns.

You can also learn the flat rate for your business as well as the costs and benefits of joining the scheme, by using a flat rate VAT calculator. Usually, such calculators are provided by the tax regulators and accounting service providers. If you want to have a personal consultation about the VAT schemes best suited for your business, consult 1StopVAT team.

Differences for limited cost traders

If you are operating in the UK and your costs are less than 2% of your turnover, you are considered to be a limited costs business. To curb the become subject to paying a higher, 16.5% flat rate.

How to join the scheme?

Similar to VAT registration, joining the flat rate VAT scheme is a quick process. You can either choose a flat rate VAT scheme when registering for VAT or enrol via filling in an online form. When completing the form, you will need to know you the flat rate percentage that you will use as well as your proffered date to begin using the flat rate scheme.

If you have just left the scheme and want to re-join, you will need to wait 12 months until you can submit your application again.