Using standard VAT accounting, the VAT that you pay to or claim back from HM Revenue & Customs is the difference between the VAT that you charge your customers and the VAT you pay on your purchases. Using the Flat Rate Scheme, you pay VAT as a fixed percentage of your VAT inclusive turnover. The actual percentage used depends on your type of business.
Who can join the Flat Rate Scheme?
You can join the Flat Rate Scheme for VAT if your estimated VAT taxable turnover – excluding VAT – in the next year will be less than £150,000. Your VAT taxable turnover is an accumulation of everything that you sell during the year that is liable for VAT, including standard or reduced rate or zero rate sales. It excludes the actual VAT that you charge, VAT exempt sales and sales of any capital assets.
Generally, you don’t reclaim any of the VAT that you pay on purchases, although you may be able to claim back the VAT on capital assets worth more than £2,000. Once you have joined, you can stay within the scheme until your total business income is in excess of £230,000.
Who can't join the Flat Rate Scheme?
Unfortunately, you can't join the Flat Rate Scheme if:
- You were in the scheme and absconded during the previous 12 months.
- You are or have been, within the previous 24 months, eligible to join an existing VAT group or register for VAT as a division of a larger business.
- You use one of the margin schemes for second-hand goods, art, antiques and collectibles, the tour operators margin scheme or the capital goods scheme.
- You have been convicted of a VAT offence or been charged a penalty for VAT evasion within the last 12 months.
- You business is closely associated with another or similar business.
Working out your Flat Rate Percentage and VAT.
There is a range of flat rate percentages that correspond to different business sectors. You’ll need to choose the sector that best describes your main business activity for the coming year, using only one percentage. If you work in more than one business sector, you must select what represents the greater part of your turnover. You’ll then need to apply that percentage to your total turnover.
There’s a one per cent reduction in the flat rate percentages for your first year of VAT registration. This reduces the flat rate percentage until the day before the first anniversary of your VAT registration, the discount even applying if the flat rate percentage changes for your sector during your first registered year.
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