The Flat Rate VAT Scheme is a way of paying your VAT liability whereby you or your business pays a fixed percentage of its turnover. The flat rate percentage usually depends on your business type & you may get a different rate if your expenditure on goods is below 2% of your turnover or you only pay £1,000 or less in a year on goods. If this is the case, your business is termed a limited cost business and your flat rate is 16.5%. Flat rates for businesses that are not classified as limited cost can be found HERE. It is possible to fluctuate between your reduces business flat rate percentage and the higher limited cost rate.
When on a flat rate scheme your VAT liability is calculated by finding your percentage rate against your ‘gross sales’. Say you were in the construction industry, your rate would be 9.5%. You invoice a client for £100 + VAT giving you a gross of £120. The amount you pay to HMRC is £11.40 (9.5% of 120), pocketing the £8.60. However, this means that you can not claim any VAT back on expenses, so obviously is beneficial to where you have limited VAT expenses.
At Taxfile we can help you decide whether a flat rate scheme would be beneficial to your business as well as monitor your VAT return to see when it may be time to sign off from the scheme.