The purpose of the flat rate VAT scheme is to make it easier and less time-consuming for smaller businesses to account for their VAT.

However, it also has the potential for some businesses to save thousands in VAT payments each year. To qualify, a business must have a taxable turnover, not including VAT, of no more than £150,000 in a year and also have a total turnover, not including VAT, of no more than £187,500 in a year.

A business works out its VAT for each return, whether quarterly or yearly, by multiplying its VAT-inclusive turnover by a fixed figure. The figure is determined by the sector in which the business operates.

If this amount, say, comes to £30,000 in the accounting period, and the flat rate for that business’s industry sector is 11%, then the amount of VAT owing will £30,000x11%=£3300. In other words, a business no longer has to calculate or record the input and output liability of every single sale or purchase.

The invoices raised by the business must charge its VAT at the correct rate for whatever is being supplied and not at the flat rate.

The key to saving vat is identifying the trade sector that your business will fall into as the flat rate percentage a business uses will depend on which sector it falls within. Once a business has been accepted by Customs and Excise for the scheme, it will stay within its chosen sector.

It is important to remember that the flat rates are set as an AVERAGE. As a result, some businesses will end up paying less VAT, others more. You need to do the calculation in your own situation to see if your vat payments are more or less than your industry average. It's also worth noting that if your business doesn't fall into one of the pre-defined categories you can simply pay 10 or 11% depending on your circumstances which may be far lower than your normal vat payments and so make considerable savings.

For advice on whether this scheme would be beneficial for you, please contact us.

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