The flat rate scheme of VAT registration is often preferred by small businesses. Registering under the flat rate scheme instead of registering under the standard rate can reduce the amount of vat that your business has to pay to the government. The standard rate of VAT is currently 20% (2013) whereas the flat rate scheme will range from 4% to 14.5%.

What is the flat rate scheme?

If your taxable businesses sales are estimated to be less than £150,000 in a 12 month period you can register with HMRC for the Flat Rate Scheme. The VAT Flat Rate Scheme may benefit many small businesses. The intention behind the scheme is to simplify preparing a VAT return and save small businesses time. Instead of accounting for all input and output VAT a set percentage rate is used to calculate VAT due from sales.

You are still required to add VAT to all customer invoices but you do not need to record every item of VAT on sales or purchases in your actual accounts. The amount of VAT due is simply calculated as a ‘flat rate’ percentage of your sales including the VAT you have added.

In addition to saving time, the flat rate scheme can have financial benefits. Some businesses have very few purchases to reclaim the VAT from, so using a set percentage rather than calculating actual VAT due can mean the VAT you return is actually less than the amount invoiced.

Example of additional profit using the flat rate scheme

The percentage of tax paid under the flat rate scheme will depend on the industry in which you operate. The following example demonstrates a business on a 12% flat rate (e.g. estate agents, investigation or security business, laundry business and many others).

Amount you invoice the customer£10,000
VAT charged to customer at 20%£2,000
Gross amount invoiced to customer£12,000
Flat Rate VAT of 12% due to HMRC£1,440
VAT invoiced less VAT paid£560.00

If you deduct the VAT actually paid from the amount charged to the customer you have added £560.00 to your profit. In addition to this, in your first year you are eligible for a further 1% discount keeping an extra £120 in your pocket.

Advantages and Disadvantages

Advantages of flat rate scheme

  • Simplified bookkeeping
  • Easier to calculate VAT return each quarter
  • No errors calculating different rates of VAT on products or services
  • Extra 1% saving in the first year

Disadvantages of flat rate scheme

  • If you supply a lot of zero-rated products or services you may pay more VAT
  • If you have a large expenditure on standard rate VAT items you may not be able to reclaim all of the VAT from the purchase

Additional points

Having joined the scheme you are eligible to remain within the flat rate scheme until your business income/turnover reaches £230,000. At this point, you will need to register for standard VAT and complete a standard VAT return.

The flat rate scheme is not suitable for all businesses. It will depend on the type of business sector you operate within and the amount of stock or services you purchase. However, as the example above demonstrates it is possible to increase your profit by using the flat rate scheme. Many small businesses prefer the simplified reporting and find it easier to calculate VAT due on sales using a simple calculation of the invoices issued.

If you are not sure whether to register for standard rate VAT or the Flat Rate Scheme we recommend you seek advice from an accountant.