VAT Flat Rate Scheme

The Salient Features 

Introduction

• The VAT Flat Rate Scheme was first introduced April 2002 to help simplify the way in which businesses accounted for and reported their VAT.
• From 1 April 2017, the rules changed on how Flat Rate Scheme VAT should be applied.

How does the Flat Rate Scheme Work?

• Businesses calculate their VAT payment as a percentage of total gross turnover.
• There is an added incentive whereby the flat rate percentage is reduced by 1% in the first year of VAT registration.
• The amount of input tax that you can claim back is limited to purchases of capital assets of £2,000 or more.

What Conditions Apply to Join the Scheme?

• To be eligible to use the Flat Rate Scheme, the business must not exceed an annual taxable turnover of £150,000 net and a total turnover not exceeding £187,500 net.
• You can’t use the scheme with the Cash Accounting Scheme. Instead, the Flat Rate Scheme has its own cash-based method for calculating the turnover.^*1

What are the Changes to the VAT Flat Rate Scheme?

• Changes to the Flat Rate Scheme aimed at businesses with a low-cost base, known as “limited cost traders”.
• Limited cost traders have to apply a percentage rate of 16.5%.
• Businesses that spend less than 2% of their sales on goods in an accounting period are now classified as limited cost traders.

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