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Flat Rate VAT Scheme – an overview

 

An alternative to the standard VAT scheme is the flat rate VAT scheme which offers qualifying businesses a simpler way of accounting for their VAT transactions.

Under the standard VAT scheme, you account for all the input and output VAT you receive from customers, or pay out to suppliers. Each quarter, you calculate how much VAT you must pay to HMRC (assuming you have received more VAT than you have paid out).

Under the flat rate VAT scheme, you apply a fixed percentage to your turnover each year, and pay this sum to HMRC, rather than calculating the input and output VAT on each transaction you make.

The flat rate percentage varies depending on the business sector or industry you are in. For example, accountants and IT contractors currently pay 14.5%, and a travel agent pays 10.5%.

Flat Rate VAT Scheme Notes

  • You can join the scheme if your estimated turnover will be £150,000 or less over the next 12 months (excluding VAT).
  • Generally you cannot reclaim VAT on purchases under the scheme, as this has been factored into the fixed rate percentage for your industry, however you should be able to reclaim VAT on capital asset purchases of £2,000 or more.
  • You can stay in the scheme until your total business turnover is greater than £230,000
  • When you charge clients or customers via your business, you do so at the standard 20% VAT rate.
  • You still need to complete a quarterly VAT return to HMRC.
  • Your business can leave the flat rate VAT scheme at any time.
  • In your first year under the scheme, you can apply a 1% reduction to the standard flat rate for your industry as an extra incentive.

Pros and Cons of the Flat VAT Scheme

Clearly, from an accounting point of view, the flat rate scheme offers many advantages as you don’t need to record the VAT element of all your purchases and supplies.

If you make a large amount of purchases, then in many cases, you will be better off with the standard scheme. In many other cases, you will be better off under the flat rate scheme.

You should discuss the benefits of the flat rate scheme vs. the standard scheme with your accountant to see if which scheme would be the most cost effective for you to join.

Full details of the applicable rates, together with full guidance and application forms can be found here.

 

 

FLAT RATE SCHEME

 

Flat Rate Scheme percentage rates from 4 January 2011
These rates will apply from 4 January 2011 until further notice. Previous rates can be found in the 2009 Pre-Budget Report. See link at the foot of this table.
Category of business
Appropriate percentage
Accountancy or book-keeping
14.5
Advertising
11
Agricultural services
11
Any other activity not listed elsewhere
12
Architect, civil and structural engineer or surveyor
14.5
Boarding or care of animals
12
Business services that are not listed elsewhere
12
Catering services including restaurants and takeaways
12.5
Computer and IT consultancy or data processing
14.5
Computer repair services
10.5
Dealing in waste or scrap
10.5
Entertainment or journalism
12.5
Estate agency or property management services
12
Farming or agriculture that is not listed elsewhere
6.5
Film, radio, television or video production
13
Financial services
13.5
Forestry or fishing
10.5
General building or construction services*
9.5
Hairdressing or other beauty treatment services
13
Hiring or renting goods
9.5
Hotel or accommodation
10.5
Investigation or security
12
Labour-only building or construction services*
14.5
Laundry or dry-cleaning services
12
Lawyer or legal services
14.5
Library, archive, museum or other cultural activity
9.5
Management consultancy
14
Manufacturing fabricated metal products
10.5
Manufacturing food
9
Manufacturing that is not listed elsewhere
9.5
Manufacturing yarn, textiles or clothing
9
Membership organisation
8
Mining or quarrying
10
Packaging
9
Photography
11
Post offices
5
Printing
8.5
Publishing
11
Pubs
6.5
Real estate activity not listed elsewhere
14
Repairing personal or household goods
10
Repairing vehicles
8.5
Retailing food, confectionary, tobacco, newspapers or children's clothing
4
Retailing pharmaceuticals, medical goods, cosmetics or toiletries
8
Retailing that is not listed elsewhere
7.5
Retailing vehicles or fuel
6.5
Secretarial services
13
Social work
11
Sport or recreation
8.5
Transport or storage, including couriers, freight, removals and taxis
10
Travel agency
10.5
Veterinary medicine
11
Wholesaling agricultural products
8
Wholesaling food
7.5
Wholesaling that is not listed elsewhere
8.5

http://www.hmrc.gov.uk/vat/start/schemes/flat-rate

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