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Updated: 9 June 2023
The Flat Rate VAT Scheme is a simplified method of calculating VAT payable to HMRC. Under this scheme, a business pays a fixed percentage of its gross sales as VAT to HMRC. The Flat Rate VAT Scheme can enable small businesses to simplify their VAT accounting and potentially reduce costs. It is not, however, necessarily the best option for all small businesses, so read on below to see if it can help you.
Under the Flat Rate VAT Scheme, eligible businesses pay a fixed percentage of their gross sales as VAT to HMRC. The exact percentage paid depends on the type of business.
To meet the basic eligibility criteria for the Flat Rate VAT Scheme, businesses must:
Businesses may be disqualified from the Flat Rate VAT Scheme if HMRC has outstanding or previous concerns about their tax management.
The Flat Rate VAT Scheme offers several benefits to small businesses. Here are some of the key advantages.
The Flat Rate VAT Scheme simplifies the accounting process for businesses by reducing the need for complex calculations and record keeping. Businesses only need to calculate their VAT based on their gross sales, rather than separating input and output VAT. This means that businesses can spend less time on VAT accounting and more time on running their business.
Under the Flat Rate VAT Scheme, businesses pay a fixed percentage of their gross sales as VAT to HMRC. This means that they know exactly how much VAT they need to pay each quarter, which can help with cash flow management. This can be particularly helpful for businesses that have irregular sales patterns or are just starting out.
The Flat Rate VAT Scheme can potentially save businesses money, as the fixed rate is often lower than the standard rate of VAT. Businesses can also benefit from reduced accounting costs, as the simplified process means that they may not need to hire an accountant or spend as much time on accounting tasks.
While the Flat Rate VAT Scheme offers several benefits, it also has some drawbacks that businesses should be aware of. Below are some of the key disadvantages.
Input VAT is the tax that a business pays on its purchases and expenses. In many cases, these costs can be reclaimed from HMRC.
However, businesses on the Flat Rate VAT Scheme cannot reclaim input VAT on most purchases, except for certain capital assets costing £2,000 or more. This means that businesses that have high input VAT, such as those that purchase a lot of goods and services, may not benefit from the scheme as much as those with lower input VAT.
While the fixed rate of VAT is often lower than the standard rate, businesses on the Flat Rate VAT Scheme can end up paying more VAT than they would on the standard VAT scheme in certain circumstances. This is because the fixed rate takes into account the average input VAT of businesses in the same sector, which may be lower than a business’s actual input VAT.
Here is a comparison of the Flat Rate VAT Scheme with the standard VAT scheme and the factors to consider when choosing between them.
| Flat rate VAT scheme | Standard VAT scheme | |
| Eligibility | Available to businesses with a taxable turnover of up to £150,000 per year. | Available to all businesses. |
| Calculation of VAT bill | Applies a fixed percentage rate to the gross turnover of the business, based on the sector in which the business operates. | Calculates VAT owed based on the difference between VAT charged to customers and VAT paid on purchases.. |
| Rates | Fixed rates vary by sector, typically ranging from 4% to 14.5% | Standard rate of 20%, reduced rates of 5% and 0% for certain goods and services. |
| Reclaiming input VAT | Not allowed, except for the purchase of capital assets over £2,000. | Allowed, subject to certain conditions. |
| Administration | Simpler record-keeping and less frequent VAT returns. | More complex record-keeping and more frequent VAT returns. |
| Key benefit | Simplifies VAT calculations and hence reduces the administrative burden on a business. | Allows for reclaiming input VAT, which may result in lower overall VAT payments. |
| Key drawback | May result in higher overall VAT payments, particularly for businesses with low input VAT. | Requires more complex record-keeping and administration, particularly for larger businesses. |
Paying your tax bills
If paying a VAT or other tax bill creates a pinch point in your cash flow, you can spread it out monthly using FlexiPay. It’s free to set up and you only pay when you use it, with a simple flat fee. It can be used for a wide variety of payments including stock and invoices, and HMRC bills are one of the most popular uses among our customers.
While we want to help as much as we can, the information found here is provided solely for informational purposes and should not be considered financial or legal advice. To the extent permitted by law, Funding Circle does not accept any liability for any loss or damage which may arise directly or indirectly from the use of, or reliance on, the information contained here. If you have any questions, please speak to your professional adviser or seek independent legal advice.
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