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Tax & accounting

VAT Flat Rate Scheme: eligibility, limited cost rate and leaving

The Flat Rate Scheme lets small businesses pay VAT as a fixed percentage of turnover instead of tracking VAT on each purchase. Here are its main rules, taken from HMRC Notice 733.

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How the scheme works and who can join

You apply a flat rate percentage, set by your trade sector, to your turnover to arrive at the VAT you pay HMRC. An allowance for input tax is built into the flat rates, so you don't recover input tax on purchases, apart from special rules for capital goods.

The scheme is for businesses expecting taxable turnover of £150,000 or less (excluding VAT) in the next year. HMRC says it is unsuitable if you regularly receive repayments, and it cannot be combined with the Cash Accounting Scheme.

The limited cost business rate of 16.5%

If you're a limited cost business, you must use 16.5% whatever your sector. That is the case if your spending on relevant goods (including VAT) is less than 2% of your flat rate turnover, or more than 2% but less than £1,000 a year (£250 for a quarterly return). Businesses close to 2% may need to run the test for every return.

First year reduction and leaving the scheme

In your first year of VAT registration, you can take 1% off your flat rate until the day before the first anniversary of registration, unless you registered 12 months after you were required to.

You must leave if, on the anniversary of joining, your total income (including VAT) for the year is more than £230,000, or if you expect income in the next 30 days alone to exceed £230,000 (sales of capital assets are left out in both cases). If your annual income passes £230,000, you may still be able to stay if HMRC is satisfied that your income in the next 12 months will not exceed £191,500.

Frequently asked questions

Do I still issue VAT invoices on the Flat Rate Scheme?

Yes. You must still issue VAT invoices to your VAT-registered customers, who treat them as normal VAT invoices. Include the VAT-inclusive total of those invoices when you calculate your scheme turnover.

Which sector do I use if my business has several activities?

You apply the percentage for your main business activity, measured by turnover. If the limited cost business rate applies, you must use 16.5% instead.

What if no sector fits my business?

Look for a match or a close fit in HMRC's list. Only if nothing fits should you use 'Any other activity not listed elsewhere'.

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