Simple Guide To Flat Rate VAT

9th November 2021

Could your business be saving time and money with the Flat Rate VAT scheme? VAT can be a pain to work out, and the Flat Rate VAT Scheme can free up your time and make record-keeping easier. 

But what exactly is VAT? And what is the Flat Rate VAT Scheme? Are you eligible? Keep reading for our simple guide to Flat Rate VAT.

What is VAT?

VAT stands for value-added tax and is widely referred to as goods and service tax. It’s a form of tax that’s assessed incrementally at each stage of the production process, as opposed to a permanent rate throughout. 

It varies depending on the price of a product or service at each step of production, distribution, or end sale.

This form of consumption tax is applied to any purchase of goods or services, as well as other supplies that are classed as taxable. 

VAT is an important aspect of any business and can be charged on a variety of goods and services provided.  

Although many businesses are affected by VAT in a similar way, charities will have slightly different rules regarding VAT. However, for the majority of businesses, taxable areas include:

  • Commission earned 
  • Staff sales (for example, staff meals) 
  • Business assets sold 
  • Hire or loan of goods 
  • Sale of business goods and/ or services 
  • Exchanges (for example, swapping a new product for an old product) 
  • Business goods used for personal reasons

VAT is paid by the consumer as opposed to the business - and isn’t a tax on an individual business. However, businesses will still pay VAT to HMRC - but the cost has already been covered by customers by the purchase of the goods. 

Because of this, it’s an indirect tax - however, businesses are still responsible for reporting it in detail to HMRC, and failing to do so can result in investigations and penalties. Click here for information on how we can help with HMRC investigations.

What is the Flat Rate VAT Scheme? 

The Flat Rate Scheme means that you charge VAT to your customers and pay VAT to your suppliers whenever you purchase goods or services from them in the usual way. 

However, the Flat Rate VAT Scheme means that when it’s time to prepare your VAT return and pay HMRC the VAT owed, you go about things slightly differently. 

Usually, you’d add up the VAT your business charged and then minus the VAT that you can reclaim.

However, with the Flat Rate VAT Scheme, you simply add all your sales up (including charged VAT) and pay a certain percentage of the sales to HMRC. 

The percentage that you owe depends entirely on what trade your business is in (with the exception of limited cost traders). 

The Flat Rate Scheme makes bookkeeping a lot easier, as it requires fewer calculations and you don’t have to take the time to work out what VAT you can claim. 

The scheme can also save you money, depending on what sector you’re in and how much VAT you pay on your outgoings. 

It may be worth checking your VAT on an online Flat Rate VAT Scheme calculator to check if your business will benefit from the scheme or not. 

Who Is Eligible for The Flat Rate VAT Scheme?

Not every business is eligible for the Flat Rate VAT Scheme - there are certain requirements that your business needs to reach in order to be accepted onto the scheme. 

One of the conditions that you should meet in order to be eligible is that your total estimated VATable sales are under £150,000 for the upcoming year, including any products or services you’re planning to sell that are VAtable. 

You won’t be eligible for the scheme if you were previously on the scheme and you left it under a year ago - to rejoin, you’ll need to wait a year. 

Another reason that you won’t be eligible for the Flat Rate VAT Scheme is if you’ve been charged a penalty for evading VAT or you’ve been guilty of a VAT offence in the last 12 months. 

It’s easy to apply - if you’re interested in joining the Vat Flat Rate Scheme and you’re eligible, simply apply through HMRC. 

If your business is closely associated with another business, or if you use a second-hand margin scheme, then you won’t be able to join the scheme. 

For more information on VAT and to find out how we can help you, click here.

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