To understand Flat Rate VAT, you first need to know the basics about VAT in general. VAT stands for value-added tax and is a type of indirect tax. It’s charged at 20% on goods and services. Businesses with a taxable turnover of £85,000 or more must be registered for VAT, while smaller businesses can decide whether or not to do so.
Flat Rate VAT is a way of simplifying your business taxes. It means that you can base the amount of VAT you pay to HMRC on your total sales rather than working out your “input” and “output” VAT. It’s a popular choice among smaller businesses because it minimises the administrative workload that comes with filing your VAT returns each year, but it’s important to consider whether it’s the best fit for your business.
How does the VAT Flat Rate Scheme work?
Normally, businesses that are registered for VAT are required to log their earnings and expenses with HMRC each fiscal quarter. This means reporting the amount you’ve earned and the VAT you’ve charged your customers as well as the amount you’ve paid out for business costs, including the VAT you’ve paid your suppliers. The VAT you owe is worked out by subtracting your expenses from your earnings.
If you register for the VAT Flat Rate Scheme, you’ll still charge and pay VAT as normal. However, when you report to HMRC, you simply need to report your sales including VAT and pay a percentage of that to HMRC. This can help to simplify accounting for small businesses and make payments easier to predict.
If you decide that the VAT Flat Rate Scheme is a good fit for your business, you’ll need to apply to join the scheme with HMRC. You can do this via phone, post or email as set out on the gov.uk website.
Who does Flat Rate VAT apply to?
Many (but not all) small businesses are eligible for the VAT Flat Rate Scheme – that is, businesses with a taxable turnover of £150,000 per year or less. Once in the scheme, you can remain a part of it until your total yearly income reaches £230,000.
There are a few exceptions it’s important to be aware of: you can’t use the Flat Rate scheme if you’ve been found guilty of a VAT offence, if you were previously a member of the scheme but left within the last year, if you have “associated” businesses, or if you’re part of certain “Margin” schemes or VAT groups. It’s always worth checking with an accountant whether your business is eligible for the Flat Rate VAT Scheme.
Is Flat Rate VAT good for my business?
There are pros and cons to signing up for the Flat Rate VAT Scheme. Many of those who opt in do so because it makes accounting simpler and it can also work out better financially for businesses in certain industries.
However, it does mean that you can’t reclaim VAT on your purchases, and this can be a particular problem if you make VAT-exempt sales.
How can I work out my Flat Rate VAT percentages?
Your Flat Rate VAT rates will be based on a percentage of the sales you make, but this percentage varies depending on the nature of your business. Limited costs businesses pay a higher rate while different sectors – such as agricultural, IT, or hospitality – all have their own flat rate percentages. There have also been allowances made during the COVID-19 pandemic for the catering and accommodation industries, as it’s recognised that they will be hit especially hard by the economic effects of the lockdown.
You can see the current VAT flat rates on the gov.uk website. You can also find VAT Flat Rate Scheme calculators online which helps you work out what you can expect to pay based on your sales and business type.
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