Overview of the UK’s New VAT Flat Rate Scheme

December 6, 2022

A VAT-registered firm will typically charge VAT on sales to customers and pay VAT on purchases. The difference between the VAT charged and the VAT paid is usually paid (or claimed back) from HMRC by the firm. However, there is an alternate approach to dealing with UK VAT for certain firms – the Flat Rate Scheme (“FRS”).

What Is the Flat Rate VAT Scheme?

The amount of VAT, a company, pays or reclaims from HMRC is usually the difference between the amount of VAT charged by the business to its customers or clients and the amount of UK VAT paid by the company for its purchases (i.e., from suppliers, etc.).

Different regulations apply to the UK VAT Flat Rate Scheme. Under this finance scheme, you –

●      Pay HMRC a flat (fixed) VAT rate and keep the difference between the VAT charged to consumers and the flat rate paid to HMRC.

●     Cannot recoup any VAT paid (e.g., to suppliers) unless you have purchased specified capital assets worth more than £2000.

Which Firms Are Eligible to Participate in the VAT Flat Rate Scheme?

Businesses must register for UK VAT if their VAT-taxable turnover (the sum of everything sold that is not VAT free) reaches £85,000, known as the ‘VAT threshold.’ They may also voluntarily register for VAT if they do not reach the VAT threshold.

The UK VAT Flat Rate Scheme has a secondary threshold of £150,000 that operates differently.

Businesses may choose to participate in the plan if their taxable turnover does not exceed £150,000. To be eligible, they must have a VAT-taxable turnover of £150,000 or less (minus VAT) in the following 12 months. You will cease to be eligible to use the scheme if the total value of your income for the year ending is more than £230,000.

However, if HMRC is satisfied that the total value of your income in the next 12 months will not exceed £191,500, you may be eligible to remain in the scheme.

These figures include VAT-inclusive income of all taxable and exempt supplies.

Which Firms Are Not Eligible to Participate in the VAT Flat Rate Scheme?

Businesses cannot join the Flat VAT Rate Plan for several reasons. These include:

  • If they have already left the scheme within 12 months.
  • They had committed a VAT violation during the preceding 12 months (e.g., VAT evasion)
  • They had previously joined (or were eligible to join) a VAT group.
  • In the past 24 months, they registered for VAT as a business division.
  • Their company is ‘closely related to another company.
  • They’ve enrolled in a margin or capital goods VAT plan.

Additionally, firms cannot utilize the Flat VAT Rate Scheme in conjunction with the Cash Accounting Scheme.

What Impact Does MTD for VAT Have on the Flat Rate Scheme?

Making Tax Digital (MTD) for VAT may require more firms to use software and store VAT records online.

It is an excellent chance to modernize your bookkeeping and get the advantages of cutting-edge technology. You may eliminate administration and do more of what you like.

Just as the flat rate plan intends to simplify UK VAT general accounting, the requirements for MTD for VAT are likewise simplified compared to standard VAT accounting according to the UK VAT laws.

Reduce the number of digital recordings you store. Specifically, you only need to retain digital records of Purchases if they are capital expenditures for which you want to claim input tax; and Sales if they are capital expenditures for which you intend to claim input tax.

VAT Flat Rate Scheme vs. Standard VAT Accounting Scheme

Assuming the average VAT rate is used with the Standard VAT accounting Scheme, your company must pay HMRC the 20% tax on eligible sales in the preceding quarter.

However, you may recover the UK VAT you pay on your purchases.

The Flat VAT rate scheme changes let your firm pay HMRC a predetermined VAT rate while preserving the difference between what you charge consumers and what you pay to HMRC.

Except for certain capital assets costing more than £2,000, you cannot reclaim VAT on your purchases.

Although limited-cost firms must pay a higher fixed rate of 16.5%, non-limited-cost businesses may apply fixed flat VAT rates ranging from 4% to 14.5% to their gross revenue, including VAT, depending on the company sector or type.

For example, an advertising firm might charge a set VAT level flat rate of 11%, whereas a textile producer would pay 9%. Other VAT systems, such as the cash accounting plan, are worth investigating.

How Do You Leave the Scheme?

There are specific requirements that firms must follow when exiting the VAT scheme. It is critical information for company owners considering altering their VAT status or closing their doors entirely.

To exit the VAT scheme, the following procedures you must take:

1. Inform HM Revenue and Customs (HMRC)

To begin with, inform HMRC that you are exiting the flat VAT scheme. It may be accomplished by mailing them a letter or completing an online form.

2. Cancel Your Registration for VAT

It may be accomplished by completing an online form or by writing to HMRC. Please include the name of your company, its address, and its VAT registration number.

3. Remit Any Overdue VAT

If you have any overdue VAT, you must pay it before leaving the VAT plan via making an online payment or mailing a check to HMRC.

4. Maintain a Record of Your VAT Transactions

After you have completed all of the essential processes to exit the VAT scheme, you must retain records of your VAT transactions. It is critical if HMRC audits you.

Bottom Line

The VAT Flat Rate Scheme in the United Kingdom may be tremendously helpful to small enterprises. It may save them money and time and make their VAT return considerably easier.

We hope that after reading this blog, you have a fair understanding of the VAT flat rate scheme. However, it is advisable to take assistance from experts like GJM & Co. for VAT flat rates, tax filings, bookkeeping, and financials of a company. We will walk you through the key details and manage everything for you!

Should you have any queries or need consultation, Schedule a Call today or write to us at info@gjmco.in.