VAT flat rate scheme – Pros and Cons 

5 September 2022

The flat rate scheme is only available to VAT-registered businesses which expect their annual VAT taxable turnover to be £150,000 or less.

advice : Tax

The flat rate scheme offers an easier way to work out the VAT that traders need to pay over to HMRC. However, it is available only to eligible traders and might cost more than working out VAT in the traditional way.

VAT flat rate scheme

Under the flat rate scheme, traders pay a percentage of their VAT-inclusive turnover over to HMRC, rather than working out the difference between their output VAT and their input VAT. The percentage is set by HMRC and depends on the business sector.

Who is eligible?

The flat rate scheme is only available to VAT-registered businesses which expect their annual VAT taxable turnover to be £150,000 or less. This is the total of everything that they sell that is not exempt from VAT and is exclusive of VAT. A trader cannot rejoin the scheme if they have left it in the previous 12 months.

After joining this scheme, a trader can remain unless their turnover in the last 12 months was higher than £230,000 including VAT, or the expectations of turnover in the next 30 days alone to be more than £230,000 including VAT. If that is the case, a trader must leave the flat rate scheme and work out VAT in the traditional way.

Advantages & Disadvantages

The main advantage of the flat rate scheme is its simplicity. Under this scheme, a trader doesn’t need to keep detailed records, particularly of VAT on purchases and expenses. The VAT paid over to HMRC is simply the flat rate percentage multiplied by the VAT-inclusive turnover in the selected period. The flat rate scheme may also save money if the VAT at the flat rate is lower than that using the traditional calculation.

The main disadvantage is of the flat rate scheme the possibility of higher VAT sums occurring that need to be paid to HMRC in comparison with the traditional calculation. This is the case if the amount determined using the flat rate percentage is higher than the difference between output VAT and input VAT in the period. Most of it will depend on whether the trader’s input VAT is covered by the margin allowed by the flat rate percentage.

The scheme can be very costly for limited-cost businesses (where goods are less than 2% of turnover or £1,000 a year). Limited-cost businesses must use a higher rate of 16.5% to work out the VAT to pay over to HMRC, regardless of the sector.

When deciding whether a business is a limited-cost business or not, no account is taken of spending on services on which VAT is incurred. The flat rate percentage for limited cost businesses of 16.5% of VAT-inclusive turnover is equivalent to 19.8% of net turnover, leaving little margin for input VAT recovery as 99% of the VAT charged at 20% must be paid over to HMRC. 

This is problematic for a business that spends little on goods but incurs significant VAT on services and items such as fuel and promotional items, that are excluded from the calculation. In this case, the trader may pay much more VAT over to HMRC than under traditional VAT accounting.

Nothing on this page is intended to be or should be construed or taken as accountancy, investment, tax or any other kind of advice. We recommend individuals and companies seek professional advice on their circumstances and matters.