The flat rate scheme for small businesses was introduced to reduce the administrative burden imposed when operating VAT.

Under the scheme a set percentage is applied to the turnover of the business as a one-off calculation instead of having to identify and record the VAT on each sale and purchase you make.

The scheme is optional and open to businesses whose VAT exclusive annual taxable turnover does not exceed £150,000 and total turnover (including the value of exempt (e.g. rents) and non-taxable income) does not exceed £187,500.

You may stay in the scheme provided your total turnover (including VAT) for the year just gone does not rise above £ 225,000. This check is to be made on each anniversary of your business joining the flat rate scheme.

You must leave the scheme also if your turnover increases so that there are grounds for believing it will rise above £ 225,000 in the next 30 days alone.

Turnover for these purposes does not include proceeds from the sale of capital assets.

The turnover test applies to your anticipated turnover in the following 12 months. Your turnover may be calculated in any reasonable way but would usually be based on the previous 12 months if you have been registered for VAT for at least a year.

How the Scheme Operates

VAT due is calculated by applying a pre-determined flat rate percentage to the business turnover of the VAT period. This will include any exempt supplies and it will therefore not generally be beneficial to join the scheme where there are significant exempt supplies.

The percentage rates are determined according to the trade sector of your business and range from 2% to 13.5% as above. In addition there is a further 1% reduction off the normal rates for businesses in their first year of VAT registration.

If your business falls into more than one sector it is the main business activity as measured by turnover which counts. This can be advantageous if you have a large percentage rate secondary activity and a modest major percentage trade. You should review the position on each anniversary and if the main business activity changes or you expect it to change during the following year you should use the appropriate rate for that sector.

Although you pay VAT at the flat rate percentage under the scheme you will still be required to prepare invoices to VAT registered customers showing the normal rate of VAT. This is so that they can reclaim input VAT at the appropriate rate.

See our Flat Rate Scheme calculator which works out the VAT due on your sales invoices.

Treatment of Capital Assets

The purchase of capital assets costing more than £2,000 (including VAT) may be dealt with outside the scheme. You can claim input VAT on such items on your VAT return in the normal way but if you do you must account for VAT on a subsequent sale of the asset at the normal rate instead of the flat rate.

Summary

The scheme is designed to reduce administration although it will only be attractive if it does not result in additional VAT liabilities. The only way to establish whether your business will benefit is to carry out a calculation and comparison of the normal rules and the flat rate rules.

April 2009 and Beyond

The 2008 Pre Budget Report included an announcement that simplified the Flat Rate Scheme eligability.

From 1 April 2009 you will be able to join the flat rate scheme so long as your taxable turnover in the next 12 months is not expected to exceed £ 150,000. The second test which is based on business income will no longer apply.

A trader must still leave the flat rate scheme if the VAT inclusive value of all supplies in a year exceeds £ 225,000. From 1 April 2009, the value of these supplies should be calculated in accordance with the usual method of accounting for VAT when using the scheme (i.e. either based on cash received or invoices raised).

How We Can Help

We can advise as to whether the flat rate scheme would be beneficial for your business and help you to operate the scheme. Please feel free to contact us should you need any help within this area

See our Flat Rate Scheme Table which shows all the trade sectors and flat rate percentages in alphabetical order.

See our Flat Rate Scheme calculator which works out the VAT due on your sales invoices.