The Flat Rate VAT Scheme

The VAT Flat rate scheme allows you to calculate the amount of your VAT payment as a flat rate percentage of your VAT inclusive turnover.

The percentage that you can use is decided according to the trade sector your business is in (e.g. – for IT consultants its 13%)

You will still have to charge your clients 17.5% VAT on your net fees, but the amount you pay to HM Customs is calculated on your VAT inclusive fees multiplied by your given sector percentage.

Example

If you raise an invoice to your client as below:

Net fees	£10,000
VAT @ 17.5%	£1,700
Gross Invoice amount	£11,750

Under the normal VAT arrangements you would then pay the VAT of £1,750 to HM Customs.

However. . . . . .

If you used the flat rate scheme and had been given a sector percentage of 13%, you would pay the following amount to HM Customs;

Gross invoiced amounts × sector percentage = £11,750 × 13% = £1,527.50

Under the flat rate scheme you would therefore be better financially as you retain £222.50 of your output VAT in the business.

However . . . . . .

This financial benefit is reduced, as under the flat rate scheme you are unable to reclaim any input vat that you may be charged on business expenses.

Please note: That you are able to reclaim input VAT on purchases of any items of a capital nature greater than £2000.

If you would normally have a small amount of input vat to reclaim, then the flat rate scheme should be a benefit to your company.

The scheme is open to all vat registered businesses with an annual turnover (excluding vat) of £150,000 or less.

Finally, in your first year of VAT registration you would be entitled to a 1% discount on your normal sector percentage making the benefit greater in your first year. (i.e. in the example above the rate would be 12%)

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