Flat rate VAT explained

Flat rate VAT is an optional scheme available to VAT registered businesses through HMRC.

The Flat Rate scheme is where VAT is charged to customers at the full 20% rate, but, is only paid over to HMRC at a reduced rate.   No input VAT can be claimed back on expenses, unless the expenditure is a capital item costing over £2,000.  The difference between what is charged to customers and what is paid over to HMRC is retained by the business.

The actual rates at which the VAT is paid to HMRC depends on the nature of the trade of the business; these can be found here.  The percentage rate will be agreed upon application to HMRC to join the scheme.

The scheme is predominantly used by the service industry as they tend to be the businesses that have fewer expenses with VAT charged.  This is typically where the largest benefit will be noticed.

In order to join the scheme, your turnover cannot be more than £150,000 (excluding VAT).

Once the Flat Rate Scheme has been successfully applied for, and the fixed rate agreed, there is a 1% discount available if it is the first year of being VAT registered.


If a financial consultant applied for the Flat Rate Scheme, their relevant percentage would be 14.0%.  If this was during the first year of their VAT registration they would benefit from a 1% discount, giving a rate of 13.0% to be applied to the gross sale.

For an invoice issued for £1,000.00 + £200.00 VAT (20%), the amount payable to HMRC would be only £156.00; this would give a £44.00 gain to the business.

If you would like to know more about Flat Rate VAT, and feel your business could potentially benefit from being on the scheme, then please contact us and we will be happy to discuss your options with you.

Brook Lucas_DSC3101

Accounts & Tax

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