This scheme is designed to reduce the cost of complying with VAT obligations by simplifying the way small businesses calculate their VAT. It is available to businesses who expect their taxable turnover in the next 12 months to be no more than £150,000.
Taxable turnover is calculated by looking at the total of supplies at the positive and zero rates, excluding VAT and the value of any capital assets expected to be sold.
The flat rate scheme saves time by removing the need to calculate and record output tax and input tax in calculating the net VAT due to HM Revenue & Customs. The VAT in a period is calculated by applying the flat rate percentage to the tax inclusive business income for the period.
Following changes made in the 2008 Pre-Budget report, the flat rates were amended to take account of the decrease in the standard rate from 17.5% to 15%.*
On 1 January 2010, the flat rates broadly returned to their November 2008 levels. HM Revenue & Customs has reviewed the rates to check that they accurately reflect the VAT paid by businesses in each sector. The flat rates were published in the 2009 Pre-Budget report.
Category of business carried on
Appropriate percentage
From 1 December 2008
From 1 January 2010
Retail of food, newspapers, confectionery
2
3.5
Retail of vehicles or fuel
5.5
6
Photography
8.5
10
Estate agency
9.5
10.5
Hairdressing
10.5
11.5
Legal services
12
13
Computer and IT consultancy
11.5
13
The flat rate to be used depends on which trade sector most accurately reflects any particular business. If a business includes supplies in two or more sectors, the percentage to be used is that appropriate to the main business activity as measured by expected turnover in the year ahead.
If you start to use the flat rate scheme within a year of becoming VAT registered, you can reduce the VAT by one percentage point until the first anniversary of your registration.
If you are making supplies to other VAT registered businesses, you give them a VAT invoice charging VAT at the normal rate for the supply (not the flat rate percentage).
Most traders with qualifying turnover are eligible to join the scheme, but there are a number of exclusions designed to prevent abuse of the scheme as well as a few to avoid complex interaction with other schemes. The scheme is optional, but traders wishing to join should complete Form VAT 600 (FRS) (which can be printed off the HMRC website at www.hmrc.gov.uk).
