Flat Rate VAT. Should You Be on a Flat Rate Scheme or Not?

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Accounting can really make a difference to your business from the very day you start, and making the right decisions early on in your business can have a massive impact.

One of the common questions we get asked is “Should I be VAT registered?” and the answer varies depending on circumstances. That said, you don’t have a choice once your turnover goes over £90,000.

VAT is Value Added Tax, and if your turnover goes over the VAT threshold then you need to add VAT (20%) to your prices.

There are many ways to approach this though, and one of those that may well help you earn from being VAT registered is the VAT Flat Rate Scheme

What is the VAT Flat Rate Scheme?

The VAT Flat Rate Scheme makes the accounting and administration easier for a small business.

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

The Flat Rate Scheme is optional and available to businesses with anticipated taxable turnover (excluding VAT) of £150,000 or less in the next 12 months.

What’s the benefit of the Flat Rate Scheme?

The amount of VAT your VAT-registered business pays or claims back from HMRC is usually the difference between the VAT you charge to your customers and the VAT your business pays on your own purchases.

For example:

  • You invoice £10,000 in March (+ VAT of 20% @ £2000) = £12,000 Gross
  • Your purchases with VAT added are £960 (£800 + VAT) = £160 VAT
  • You owe HMRC £2000 – £160 = £1840

With the Flat Rate Scheme, it’s a little different.

You no longer ‘claim back’ your VAT on purchases but you do get to keep the difference between your VAT percentage charged and the VAT flat rate you’re given (dependent on industry).

For example:

  • You invoice £10,000 in March (+ VAT of 20% @ £2000) = £12,000 Gross
  • You can’t claim back purchases with VAT 
  • Your fixed rate of VAT is 16.5% so you owe £16.5% of £12,000 to HMRC (£1,920)
  • You keep the difference of 3.5% (£80).
  • So in this example, you would be better using the ordinary VAT scheme. However if you were to be an industry with a lower Flat Rate VAT percentage, then you would benefit.

What is my business current VAT flat rate (%)?

Here’s a list from March 2022. An up to date list can be found on the Gov.UK website:

  • Accountancy or book-keeping services: 14.5%
  • Advertising businesses: 11%
  • Agricultural services: 11%
  • Any other activity not listed elsewhere: 12%
  • Architect, civil and structural engineer or surveyor: 14.5%
  • Boarding or care of animals: 12%
  • Business services not listed elsewhere: 12%
  • Catering services including restaurants and takeaways before 15 July 2020: 12.5%
  • Catering services including restaurants and takeaways between 15 July 2020 and 30 September 2021: 4.5%
  • Catering services including restaurants and takeaways between 1st October 2020 to 31st March 2022: 8.5%
  • Computer and IT consultancy or data processing: 14.5%
  • Computer repair services: 10.5%
  • Entertainment or journalism: 12.5%
  • Estate agency or property management services: 12%
  • Farming or agriculture not listed elsewhere: 6.5%
  • Film, radio, television or video production: 13%
  • Financial services: 13.5%
  • Forestry or fishing: 10.5%
  • General building or construction services: 9.5%
  • Hairdressing or other beauty treatment services: 13%
  • Hiring or renting goods: 9.5%
  • Hotel or accommodation before 15 July 2020: 10.5%
  • Hotel or accommodation from 15 July 2020 and after 30 September 2021: 0%
  • Hotel or accommodation between 1 October 2021 and 31 March 2022: 5.5%
  • Investigation or security: 12%
  • Labour-only building or construction services: 14.5%
  • Laundry or dry-cleaning services: 12%
  • Lawyer or legal services: 14.5%
  • Library, archive, museum or other cultural activity: 9.5%
  • Management consultancy: 14%
  • Manufacturing fabricated metal products: 10.5%
  • Manufacturing food: 9%
  • Manufacturing not listed elsewhere: 9.5%
  • Manufacturing yarn, textiles or clothing: 9%
  • Membership organisation: 8%
  • Mining or quarrying: 10%
  • Packaging: 9%
  • Photography: 11%
  • Post offices: 5%
  • Printing: 8.5%
  • Publishing: 11%
  • Pubs before 15 July 2020: 6.5%
  • Pubs between 15 July 2020 to 30 September 2021: 1%
  • Pubs between 1 October 2021 to 31 March 2022: 4%
  • Real estate activity not listed elsewhere: 14%
  • Repairing personal or household goods: 10%
  • Repairing vehicles: 8.5%
  • Retailing food, confectionery, tobacco, newspapers or children’s clothing: 4%
  • Retailing pharmaceuticals, medical goods, cosmetics or toiletries: 8%
  • Retailing not listed elsewhere: 7.5%
  • Retailing vehicles or fuel: 6.5%
  • Secretarial services: 13%
  • Social work: 11%
  • Sport or recreation: 8.5%
  • Transport or storage, including couriers, freight, removals and taxis: 10%
  • Travel agency: 10.5%
  • Veterinary medicine: 11%
  • Wholesaling agricultural products: 8%
  • Wholesaling food: 7.5%
  • Wholesaling not listed elsewhere: 8.5%

The Flat Rate Scheme is not as helpful as it used to be…

The scheme is not as good as it used to be. It used to be attractive as the rate was super low.  Some were as low as 12%, so you kept 8% of the VAT.

Things changed when HMRC bought in the qualifying goods rule (purchasing over a period) and now many businesses have been moved up to a higher % and therefore keep less of the VAT they’ve charged. 

Because of this change, it’s imperative that you review your approach to VAT. 

Many businesses were surviving with the benefit of the flat rate scheme and will now have far less cash due to the changes. 

  • If you were on a flat rate of 12% and keeping 8% of a £10000 + VAT month (£460) 
  • Now if you’re on a flat of 16.5% and only keep 3.5% (£80) you’re £380 worse off! 

Not everything is classed as qualifying goods either, and therefore can’t be claimed back.  Services such as accountancy fees, software, car lease, rent, and mobile phones do not qualify.

Should you come off the Flat Rate Scheme?

It’s likely that (if you’ve grown) you’ll need to move off the flat rate scheme. As you grow, you’re probably financially better off not on these schemes anyway, especially if your purchasing costs go up. But please speak to an expert before making a decision.

If you’re buying lots of supplies and products with VAT added, then you’ll reach a point where the amount you can claim back from those in the traditional VAT return each quarter is greater than the amount you could keep on a flat rate scheme. 

As with anything in accounting, please contact your local accountant for advice. With the variations in the way each business operates it pays (literally) to have the right advice and the right approach.

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