Flat Rate Vat Scheme – An Insight

Flat Rate Vat Scheme

The VAT amount that a UK business pays or can claim back from the HMRC (HM Revenue and Customs) is determined by subtracting the VAT amount paid by the business on its own purchases from the VAT that the business charges from its customers.

Now coming to the Flat Rate Scheme, if you join this scheme, then, these are some of the key highlights of this fixed scheme: 

  • As a business owner, you have to pay a fixed VAT rate to the HMRC.
  • The difference between the amount of VAT that you charge to your customers and the VAT amount that you pay to the HMRC is yours to keep.
  • The VAT that you can claim on the purchases made for your business is extremely limited. You may only claim the VAT on certain capital assets that are over £2000.

You have to send an application to the HMRC to join this scheme.

Eligibility criteria for the Flat Rate VAT Scheme

To understand whether you’re eligible as a UK business owner to join the scheme, check the following points:

  • Your business must be a VAT-registered business.
  • The VAT taxable turnover of your UK-based business should be less than or equal to £150,000 in the next year (12 months). This amount is excluding the VAT.

Just remember that VAT taxable turnover stands for the total of everything that is sold that is not exempt from VAT.

Exceptions

You will not be eligible to join the Flat Rate Scheme if:

  • You applied to leave the scheme within the last 12 months.
  • If you’ve committed a VAT offense, like VAT evasion, within the last year (12 months).
  • You joined or your business was eligible to join a VAT group within the last 2 years (24 months).
  • If you registered as a business division, for VAT, within the last 2 years (24 months).
  • If you’ve joined a capital goods VAT Scheme or a margin goods VAT scheme.
  • If your UK-based business is intimately associated with another business. 

You cannot use the Flat Rate Scheme if you already use the Cash Accounting Scheme. This is because the Flat Rate VAT Scheme has its special cash-based method for calculating the turnover.

How to join this Flat Rate Scheme?

If you’re eligible and have decided to join the scheme, just follow the pointers that have been delineated below:

  • You can apply to join this scheme online while registering for VAT.
  • You also have the choice of filling VAT600 FRS.
  • After filling VAT600 FRS, you can either send this by post or email the application to frsapplications.vrs@hmrc.gov.uk.
  • You cannot use the address that will be provided on the form. Send it to this address instead:

BT VAT

HM Revenue and Customs

BX9 1WR

  • Once posted or sent via email, you will receive a confirmation notification through your VAT online account or via post in case you’ve not applied online.

You can also consider using VAT600 AA/FRS. This will allow you to apply for the Annual Accounting Scheme while you apply for the Flat Rate VAT Scheme.

How to leave the Flat Rate Scheme?

Keep the following pointers in mind if you’ve decided to leave the scheme:

  • You are free to leave the Flat Rate VAT Scheme at any time.
  • You have to leave if your business no longer meets the eligibility criteria for the scheme.
  • If it’s been 12 months since you joined the scheme and the turnover for your business in this year has exceeded £230,000 (including VAT) or you anticipate that it’s going to be over £230,000 in the following 12 months.
  • If you speculate that your total income will be over £230,000 including VAT, you have to leave this scheme.
  • For leaving the scheme, you need to write to the HMRC. They will then set your leaving date.
  • You need to wait for at least 12 months (1 year) to be able to re-join the Flat Rate Scheme.
  • Write to the HMRC at the following address:

BT VAT

HM Revenue and Customs

BX9 1WR

How to calculate your flat rate?

The flat rate is dependent upon the type of business you own.

Limited cost business: If your business’ goods cost lower than 2% of your business turnover or less than £1000 a year, it will be classified as a limited cost business. Such businesses have a fixed flat rate which is 16.5%.

For businesses that are not classified as limited-cost businesses, the flat rate for that business is calculated depending on the business type. Click here to work out your flat rate.

To determine how much tax, you have to pay to the HMRC for your business, multiply the VAT flat rate for your business with the VAT inclusive turnover for your business.

Remember to contact an Accountant in London to discuss whether this scheme is a good fit for your UK-based business.