Value Added Tax, or VAT, is a tax revenue collection method that taxes consumers and producers by adding a percentage of an item’s value to its price.
Only businesses with a turnover above £85,000 need to charge VAT on their goods and services. The standard rate of VAT is 20%, but there are many items, such as food and education, which are either exempt from VAT or charged at a reduced rate.
HOW DOES VAT USUALLY WORK?
These businesses inevitably both charge VAT to their customers, and are charged VAT on purchases they make for the business. These businesses must pay to HMRC the difference between the amount of VAT charged to customers, and the VAT it has paid to other businesses.
In short, this means that if your business has charged more VAT than it has paid, it will owe HMRC money. The reverse is also true, meaning that if you paid more VAT than you charged, HMRC will repay you the difference.
What is the VAT Flat Rate Scheme?
The VAT Flat Rate Scheme allows a business to pay a fixed percent of their turnover to HMRC as VAT owed. This simplifies the sales and invoice records you must keep, and gives you access to VAT rates that are lower than standard.
Your business keeps the difference between the VAT charged to customers, and the flat amount paid to HMRC.
This also means that you cannot reclaim the VAT on your purchases, making the Flat Rate Scheme less beneficial for businesses who usually pay more VAT on their expenses than they charge to customers.
You can still reclaim VAT on single purchases of capital expenditure goods over £2,000.
Is my business eligible for the VAT Flat Rate Scheme?
You can join the Flat Rate Scheme if your business is VAT registered, and its VAT taxable turnover is £150,000. This total must include everything you sell that is not exempt from VAT, and must not include the VAT you charge on these items.
However, you cannot use the scheme if any of the following apply:
- You left the scheme in the last 12 months.
- You committed a VAT offence in the last 12 months, for example VAT evasion.
- You joined (or were eligible to join) a VAT group in the last 24 months.
- You registered for VAT as a business division in the last 24 months.
- Your business is closely associated with another business.
- You’ve joined a margin or capital goods VAT scheme.
Is my business eligible for the VAT Flat Rate Scheme?
The amount of VAT paid to HMRC is calculated as a flat rate of your ‘VAT inclusive turnover’. This includes exempt and zero-rated items, and means that you may end up paying more VAT under the Flat Rate Scheme if these items are a larger than average portion of your business.
If your business’s expenses on goods are either less than 2% of your turnover, or less than £1,000 a year total, it is classed as a ‘limited cost business’. This means that the business pays a flat rate of 16,5%. You can use HMRC’s calculator to check if this applies to your business.
If you do not count as a limited cost business, you can find your VAT flat rate according to your business type using the table below.
|Type of Business||VAT flat %|
|Accountancy or book-keeping||14.5|
|Any other activity not listed elsewhere||12|
|Architect, civil and structural engineer or surveyor||14.5|
|Boarding or care of animals||12|
|Business services not listed elsewhere||12|
|Catering services including restaurants and takeaways before 15 July 2020||12.5|
|Catering services including restaurants and takeaways from 15 July 2020 to 30 September 2021||4.5|
|Catering services including restaurants and takeaways from 1 October 2021 to 31 March 2022||8.5|
|Catering services including restaurants and takeaways from 1 April 2022||12.5|
|Computer and IT consultancy or data processing||14.5|
|Computer repair services||10.5|
|Entertainment or journalism||12.5|
|Estate agency or property management services||12|
|Farming or agriculture not listed elsewhere||6.5|
|Film, radio, television or video production||13|
|Forestry or fishing||10.5|
|General building or construction services*||9.5|
|Hairdressing or other beauty treatment services||13|
|Hiring or renting goods||9.5|
|Hotel or accommodation before 15 July 2020||10.5|
|Hotel or accommodation from 15 July 2020 to 30 September 2021||0|
|Hotel or accommodation from 1 October 2021 to 31 March 2022||5.5|
|Hotel or accommodation from 1 April 2022||10.5|
|Investigation or security||12|
|Labour-only building or construction services*||14.5|
|Laundry or dry-cleaning services||12|
|Lawyer or legal services||14.5|
|Library, archive, museum or other cultural activity||9.5|
|Manufacturing fabricated metal products||10.5|
|Manufacturing not listed elsewhere||9.5|
|Manufacturing yarn, textiles or clothing||9|
|Mining or quarrying||10|
|Pubs before 15 July 2020||6.5|
|Pubs from 15 July 2020 to 30 September 2021||1|
|Pubs from 1 October 2021 to 31 March 2022||4|
|Pubs from 1 April 2022||6.5|
|Real estate activity not listed elsewhere||14|
|Repairing personal or household goods||10|
|Retailing food, confectionery, tobacco, newspapers or children’s clothing||4|
|Retailing pharmaceuticals, medical goods, cosmetics or toiletries||8|
|Retailing not listed elsewhere||7.5|
|Retailing vehicles or fuel||6.5|
|Sport or recreation||8.5|
|Transport or storage, including couriers, freight, removals and taxis||10|
|Wholesaling agricultural products||8|
|Wholesaling not listed elsewhere||8.5|