Flat rate VAT – getting it right

15/11/2016

Nearly all business find that they are better off adopting flat rate VAT over standard VAT, but only if they get it right.

Using the standard method, VAT is added to all invoices then manually reclaimed on every eligible item that is bought or sold. With the flat rate VAT method, you pay a single flat rate percentage on turnover each quarter, rather than for each eligible sale or purchase.

Businesses must have or expect to have an annual turnover of £150,000 (excluding any VAT charged) or less.

Flat rate VAT can save small businesses both time and money. By charging VAT at the standard 20% rate on all sales and assuming you pay that rate on all purchases, you save yourself the hassle of working out what rate to charge or what rate you have paid on every item sold or bought.

Under the scheme, small businesses pay VAT to HMRC at a lower rate. The rate depends on your business type – currently the rates range from 4 to 14.5%. Many will find they pay less VAT using the flat rate scheme, but only if they get it right.

Here are some common mistakes to look out for:

1. Forgetting to increase the flat rate percentage after the first year – In the first year of VAT registration you will receive a special rate, this must be increased by 1% after the first year.
2. Entering the Box 6 figure on the VAT return net of VAT – This should be the VAT inclusive value, even though the narrative on the box says VAT exclusive.
3. Not applying the VAT flat rate percentage to all income – You must apply the VAT flat rate percentage to all the income the VAT registered business receives, even if it is exempt income such as rent or the sale of a company car.
4. Applying the 1% reduction if you are already VAT registered – If you were previously VAT registered and change to the flat rate scheme you do not receive the 1% reduction in the flat rate scheme for the first 12 months.
5. VAT on goods purchased from other EC member states – VAT on EC acquisitions should be entered in Box 2 of the VAT return and cannot be entered in Box 4. This means you will pay 20% VAT to HMRC on acquisitions from EC areas. If you have significant EC acquisitions, it may be advisable to change to normal standard VAT returns.

The flat rate scheme is designed to save businesses time and reduce administration. It is an attractive option and when done in the right way and can provide some valuable financial savings.

For help and advice on getting your flat rate VAT right please contact Jane Spraggs

A list of current VAT flat rate percentages per business type can be found on the government website here.