VAT flat rate scheme


The Flat value added tax (VAT) rate scheme is a simplified method for businesses (that are eligible) to apply a standard tax percentage rate, based on the nature of business and VAT inclusive total revenue. As per the guidelines of this method, any VAT reclaimable is constrained. For example, if a professional service provider (whose applicable VAT rate is 14.5%) raises an invoice for a client amounting to £3,000, the total VAT payable to HMRC will be £435 (14.5% of £3,000). However, after 1 April 2017, the Flat VAT scheme has undergone certain changes which we will discuss later in this article.

The amount of VAT a business pays HM Revenue and Customs (HMRC) is the difference between VAT charged on the outward invoice and VAT charged on the inwards invoice received by the business while purchasing goods or services. By opting for a flat rate VAT scheme:

·    Business will pay a standard rate of VAT to HMRC

·    Difference between the VAT charged to the customers and the amount paid to HMRC is the earning of the business (excluding the purchase price)

Under the flat rate VAT scheme, VAT charged on a single procurement of goods can be reclaimed if the purchase amount including VAT is £2,000 or more. On the contrary, if there are multiple purchases and invoice value is under £2,000 including VAT, then VAT cannot be claimed and the input tax is considered part of the flat rate percentage calculation. For an eligible business, the VAT earnings must be £150,000 or less (excluding VAT). However, all businesses do not qualify for flat rate VAT scheme and the pre-requisite are:

· Business must be VAT registered

·   Forecast business VAT earnings to be less than or equal to £150,000, in the next one year

A business can register online for VAT or fill in VAT600 FRS form (whichever is practical) and post it to the address stated on the form. On the other hand, a business cannot join the VAT flat rate scheme if:

  • In the last years, the business withdrew from the VAT flat rate scheme
  • In the last 24 months, the business was listed for VAT as a business division
  •      In the last 12 months, the business was involved in a tax offence
  • Business joined the capital goods VAT added tax scheme

If a business is using the cash accounting method, it is not possible to opt for a VAT scheme under this. As an alternative, the scheme has a different for computation known as cash-based method.

If a business is using the cash accounting method, it is not possible to opt for a VAT scheme under this. As an alternative, the scheme has a different for computation known as cash-based method.

VAT Flat Rate Scheme Calculator

A percentage of the flat rate earnings are the VAT flat rate. For example, an invoice amounts to £2,000, + VAT @20% = £2,400 (Grand total). In this case, for a professional consultant the VAT flat rate will be 14.5% and flat rate payment = £174 (14.5% of £1,200). The flat VAT rate depends on the nature of business. Below is a list of VAT flat rates for different business types.

Type of business Current VAT flat rate (%)
Retailing food, confectionery, tobacco, newspapers or children’s clothing 4.0
Post offices 5.0
Farming or agriculture not listed elsewhere 6.5
Pubs 6.5
Retailing vehicles or fuel 6.5
Retailing not listed elsewhere 7.5
Wholesaling food 7.5
Membership organisation 8.0
Retailing pharmaceuticals, medical goods, cosmetics or toiletries 8.0
Wholesaling agricultural products 8.0
Printing 8.5
Repairing vehicles 8.5
Sport or recreation 8.5
Wholesaling not listed elsewhere 8.5
Manufacturing food 9.0
Manufacturing yarn, textiles or clothing 9.0
Packaging 9.0
General building or construction services* 9.5
Hiring or renting goods 9.5
Library, archive, museum or other cultural activity 9.5
Manufacturing not listed elsewhere 9.5
Mining or quarrying 10.0
Repairing personal or household goods 10.0
Transport or storage, including couriers, freight, removals and taxis 10.0
Computer repair services 10.5
Forestry or fishing 10.5
Hotel or accommodation 10.5
Manufacturing fabricated metal products 10.5
Travel agency 10.5
Advertising 11.0
Agricultural services 11.0
Photography 11.0
Publishing 11.0
Social work 11.0
Veterinary medicine 11.0
Any other activity not listed elsewhere 12.0
Boarding or care of animals 12.0
Business services not listed elsewhere 12.0
Estate agency or property management services 12.0
Investigation or security 12.0
Laundry or dry-cleaning services 12.0
Catering services including restaurants and takeaways 12.5
Entertainment or journalism 12.5
Film, radio, television or video production 13.0
Hairdressing or other beauty treatment services 13.0
Secretarial services 13.0
Financial services 13.5
Management consultancy 14.0
Real estate activity not listed elsewhere 14.0
Accountancy or book-keeping 14.5
Architect, civil and structural engineer or surveyor 14.5
Computer and IT consultancy or data processing 14.5
Labour-only building or construction services* 14.5
Lawyer or legal services 14.5

*Construction services mean where the value of the materials supplied in a lesser amount of 10% of the turnover of the service

VAT flat rate changes 2017

Starting 1 April 2017, important changes took place under the Flat Rate VAT Scheme. As per the modifications, there will be alteration disturbing businesses with a low-cost basis and such businesses will be categories as ‘limited cost traders’ if spending is:

  1. less than 2.0% of the VAT inclusive revenue in an accounting period
  2. in excess of 2.0% of the VAT inclusive revenue but less than £1000 for a year

Goods are defined as material not including:

  1.  any services
  2. expenses with regards to travel and accommodation
  3.  food and drink consumed by management or employees
  4. accounting fee / phone bill / broadband charges / rental
  5.  donations / promotional items
  6. cost of vehicle including fuel except an individual is in the transport business
  7. goods for reselling or sub-leasing
  8. office equipment / laptops / desktop / IT infrastructure / mobile phones / tablets

This new measure will boost the VAT payable for businesses that are more labour-intensive and spend little on goods. For examples, IT contractors, specialist and construction workers. To order to ensure that the transition to the new 16.5% Flat Rate is accurate, legislation was made available in November 2016 to prevent businesses from raising invoices or receiving payments preceding 1 April 2017 for services made available post 1 April. In point of fact, any such agreement will be deemed to have taken place on 1 April 2017 and therefore subject to 16.5% tax. For a few businesses that are within the initial 12 months of VAT registration, they are still eligible for the 1.0% first-anniversary discount. With the changes in the Flat Rate scheme, it is the choice of the business whether to opt for Flat Rate Scheme or shift to a Standard VAT Scheme. To arise at the best option for the business, it is recommended to speak to a specialist accountant before taking a call.

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