Understanding the Benefits of the VAT Flat Rate Scheme for Small Businesses

LHP Accountants
19 hours ago
3 min read

As of the April 2024, the vat threshold limit is £90,000, prior to this date the threshold was £85,000.

The VAT flat rate scheme is open to smaller businesses that expect their annual turnover in the next 12 months to be no more than £150,000 excluding VAT. The % is based on the type of business and the rate is determined by HMRC. Businesses multiply their gross turnover, by the applicable flat rate percentage to determine their vat liability.

The rates vary from 4% to 14.5%, here are a few examples:

Hairdressers – 13%
Pubs 6.5%
IT consultants – 14.5%

Additional percentages can be found on this link:

https://www.gov.uk/vat-flat-rate-scheme/how-much-you-pay

Eleri Rivers & Eleri Quann from our Lampeter Office.

Here are the pros and cons to joining this scheme:

Pros:

Make your record-keeping simpler as you don’t have to claim on purchases.
Fixed rate percentages are lower than the standard rate.
It helps manage cashflow.

1% discount is given if you’re in the first year as a VAT registered business. The entitlement to apply for the reduction runs for the 12 months following the date of registration for VAT and not the date you join the Flat Rate Scheme.
Although vat is not recoverable on expenses, it can be claimed on individual capital equipment valued at £2,000 (vat inclusive) or more.

Cons:

If the turnover exceeds £230,000 including VAT over a 12-month period, you must leave the scheme and revert back to Standard rate. However, you can appeal a removal and could remain on the FRS if turnover drops to £191,500 in the following 12 months.
Services are not reclaimable as Capital even if over £2,000.
Input VAT cannot be claimed on expenses except for purchases of capital equipment valued at £2,000 or more.
Fixed rate percentages are calculated without taking into consideration any zero-rated and exempt sales, therefore if you do sell goods and services which are primarily zero-rated or exempt then you’ll end up paying more VAT using the flat rate scheme.
You cannot use this scheme if you buy and sell goods from outside the UK – the scheme may become more complex.
Can’t join this scheme if you are on a cash accounting scheme.

Limited cost businesses –

Took effect on 1^st April 2017 where a flat rate of 16.5% is charged. There is a simple calculator available to help businesses work out whether they are a Limited cost business. Before you start, you will need some basic information. This is taken from your most recent VAT return period. If you submit quarterly returns, this will cover a period of 3 months. If you submit an annual return, this will cover a full year.

You will need to know:

Your relevant turnover.
The cost of goods must be used exclusively for the purpose of your business and certain goods are excluded from this test.

You’re a limited cost business if the amount you spend on goods, including VAT, is either:

Less than 2% of your VAT flat rate turnover.
Greater than 2% of your VAT flat rate turnover but less and £1,000 per year.

If your return is less than one year the figure is the relevant proportion of £1,000.

For a quarterly return this is £250.

For some businesses this will be clear, other businesses, particularly those whose goods are close to 2%, may need to complete this test each time they complete their VAT return. This is because you can move from a limited cost rate of 16.5% in one period to your relevant sector rate in another. This would happen if your costs go above and below 2%.

If you’re a limited cost trader this means that you may pay more VAT than you do on standard accounting — you may want to check to make sure the Flat Rate Scheme is still right for you.

For advice on the Flat Rate Scheme, please contact us.

Carmarthen Branch - Llys Deri, Parc Pensarn, Carmarthen, SA31 2NF

01267 237534 | carmarthen@lhp.co.uk

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01570 422204 | lampeter@lhp.co.uk

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01834 844743 | tenby@lhp.co.uk

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01545 570401 | Aberaeron@lhp.co.uk

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