The Flat rate VAT scheme was introduced by HMRC and came into effect from April 24th 2002 as an optional scheme for small businesses.
The scheme is open to small businesses with an annual taxable turnover of up to £100,000 or £125,000 including exempt supplies and other non taxable income.
Businesses review whether they meet these criteria on each anniversary of their joining the scheme, and if they go over the amount they must leave the scheme.
Opting into the flat rat VAT scheme means that a businesses no longer need account for the VAT on their expenses. This is because rather than being able to claim back VAT on expenses they are instead making their savings through paying a lower rate of VAT on their taxable turnover.
A business who operates under the flat rate scheme still charges the standard rate of VAT (currently 20 per cent) to their customers for taxable services and will still issue tax invoices to VAT registered customers in the usual way.
The rate of VAT paid by a small business under the flat rate scheme will vary according to what trade they operate under, but the spread is quite wide, currently ranging from 4 per cent to 14.5 per cent.
You can find a full list of sectors and their respective flat rate VAT rates on the scheme here.
If you are a limited company, opting to join the flat rate VAT scheme could be more tax efficient, depending on the nature of your business and expenses.
If you have further questions regarding limited company accounting and whether it is worth your while considering joining the flat rate scheme as opposed to paying standard rate vat, then get in touch with Technical-E now for some straightforward, jargon-free advice.
