VAT and the Flat Rate Scheme

This scheme is particularly suitable for small businesses who provide goods or services directly to the general public. The problem faced when your income crosses the vat registration threshold is that you may incur 20% vat (or, more correctly, 20/120ths of your income). Very often that cost cannot be passed on to your customers. The vat that you pay on outgoings can be offset against the vat on your income but this might only provide a small saving. For example, if you are primarily providing your own services or are in a business such as catering then there won't be much vat on your outgoings that is available to offset.

The flat rate scheme provides a far simpler way of recording vat. It may be as simple as adding up your income for each vat period and multiplying that figure by your flat rate. The answer is then entered in box 1 of your VAT Return and the total income is reported in box 6. The relevant rate to use will depend on your main business activity, as follows:

You can opt to join the scheme if you expect your total income in the next year to be less than £150,000. An application has to be sent to HM Revenue and Customs, and is available from their website. Once in the scheme, a business can continue to use the flat rate whilst your business income is less than £230,000 per annum.

Trap: In the opinion of HM Revenue & Customs, the flat rate has to be applied to all of your income.They have won a case at the Tax Tribunal which decided that rental income should be included in the calculation. The rental income from a residential property would be exempt from vat, but the flat rate scheme is a simplified scheme which solely looks at the total income of the taxpayer (note that a vat registration is for a person and encompasses every activity of that person). A possible way around this problem is change the ownership of the business or of the rental property. We can help you to find a solution.

Invoicing: If you issue invoices to your customers then you should include the standard rate of 20% vat (assuming that this relates to a UK taxable supply). However, the invoice is for the purpose of your customers vat position and will not have an impact on your own VAT Return. If you use accounting software to issue or record the invoice you will need to adjust the entries to reflect that your own vat cost is at the flat rate.


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The above information is only a general guide. We cannot accept responsibility for the financial consequences of any transaction that you may undertake or refrain from undertaking based upon the information given on this website.