The Flat Rate VAT Scheme

The Flat Rate VAT Scheme reduces red tape and helps small businesses simplify their VAT return process.

It allows businesses to pay VAT to HMRC at a fixed rate. The business keeps the difference between what is charged to the customers and paid to HMRC.

Businesses using the VAT Flat Rate Scheme cannot reclaim VAT on purchases made. The exception to this rule is for a single purchase of capital expenditure goods totalling £2000 and over.

This scheme is beneficial for some types of businesses and not so much for others. It can make it easier to keep records, can help businesses better manage their cash flow and can offer lower fixed rates than the standard rate of VAT.

However, “limited cost businesses” and those who often purchase and sell goods outside of the UK, may find this scheme more costly and complex.

Business Requirements to Qualify

If a business is VAT registered and has a predicted annual turnover of less than £150,000, it can qualify for the Flat Rate VAT Scheme.

There are some exceptions, however. A business will not be able to use the scheme if any of the following apply.

The Flat Rate VAT Scheme was left in the last 12 months.
A VAT offence has been committed in the last 12 months.
In the last 24 months, the business has joined or was eligible to join a VAT group.
VAT registered as a business division in the last 24 months.
The business is associated closely with another business.
A margin or capital goods VAT scheme has been joined.

VAT Flat Rates by Business Type

Different business types qualify for different VAT flat rates. Here are some examples. You can find rates for all business types on the UK government’s website.

Highest Rates

One of the highest VAT flat rates is 14.5%. This is reserved for business types including:

Accountancy or book-keeping.
Architect, civil and structural engineer or surveyor.
Computer & I.T consultancy or data processing.
VAT registered as a business division in the last 24 months.

Lowest Rates

The lowest VAT flat rate is currently 4%. This is reserved for retailing food, confectionery, tobacco, newspapers or children’s clothing business types. Some other low VAT flat rates include:

Post Offices (5%).
Pubs (6.5%).
Farming or Agriculture (6.5%).
Retailing Vehicles or Fuel (6.5%).

Limited Cost Businesses

If a business is classed as a “limited cost”, a VAT flat rate of 16.5% must be paid. This is for businesses that spend a very small amount on goods. Those that spend less than 2% of their turnover on goods are classed as “limited cost”. The same applies to any business that spends no more than £1000 on goods per year.