Flat Rate VAT
The VAT Flat Rate Scheme is an alternative way for small businesses to calculate VAT due to HMRC.
- If you use the Standard VAT or VAT Cash Accounting schemes – You owe HMRC the VAT you charge on your sales and can reclaim the VAT you’re charged on your purchases. The amount you actually pay or claim from HMRC is the difference between the VAT on your sales and your purchases.
- If you use the VAT Flat Rate Scheme – Your day-to-day processing remains unchanged and VAT calculates at the standard, lower, exempt, zero rated and No VAT rates as normal. The flat rate percentage applies when you calculate your VAT Return. The amount of VAT you pay to HMRC calculates as a percentage of your gross turnover, this includes all sales including those which are Zero Rated and Exempt transactions.
You can choose to use either the invoice or cash-based VAT Flat Rate Scheme. If you choose invoice-based, the VAT calculates at the point of invoicing. If you choose cash-based, it calculates at the point of payment.
You can join the scheme if you expect your VAT taxable turnover in the next 12 months to be £150,000 or less.
VAT taxable turnover is everything you sell at the standard, zero and reduced VAT rates. It excludes the VAT and the value of any capital assets you expect to sell.
You can stay in the scheme providing your total business income is no more than £230,000. This figure includes your taxable income and also the value of any exempt and non-taxable income.
If you’re not sure whether you qualify, check with HMRC.
- 1. Go to Settings, then click Accounting Dates & VAT.
- 2. From the VAT Scheme drop-down list, click the relevant Flat Rate VAT Scheme option.
- 3. In the Flat Rate (%) box, enter your flat rate percentage.
If you’re not sure what percentage to use, please check with HMRC. You’ll find further details on GOV.UK
- 4. If you haven’t already done so, complete the following:
- Choose your Submission Frequency.
- Enter your VAT Number.
- Enter your HMRC User ID.
- 5. Click Save.
You’ve successfully entered your flat rate percentage. The next time you calculate your VAT Return, the amount due to HMRC calculates using this rate.
When you first register for Flat Rate VAT, you may be given a discount of 1% for the first year. When this year is complete, you need to change the rate to the full percentage rate for the subsequent VAT periods.
There are two scenarios when this happens:
If the rate change is to take effect from the start of a new VAT period.
- 1. Complete the VAT return for the last period using the discounted rate.
- 2. Go to Settings, then click Accounting Dates and VAT.
- 3. In the Flat Rate (%) box, change the percentage then click Save.
If the rate change takes effect part way through your VAT period.
This scenario is a bit more complicated and requires a few extra steps. You can process as normal beyond the date of the rate change as the percentage only comes into effect when you process the VAT return.
For the purposes of this example, we’ll assume that the rate changes after month two of a quarterly VAT Return.
- 1. Run the VAT Return for month one and month two (using the discounted rate). Then submit it to HMRC by other means and save it.
- 2. Go to Settings, then click Accounting Dates and VAT.
- 3. In the Flat Rate (%) box, change the flat rate percentage to the new rate then click Save.
- 4. Run the VAT return for month three. Then submit it to HMRC by other means and save it.
- 5. Print the summary (showing boxes 1 to 9) for both of these VAT Returns and add the two sets of figures together for each box on these returns.
- 6. Log in to your Government Gateway account and manually submit the total figures for months one, two and three.
When you record the payment to the HMRC, you must mark both returns as Paid.
If you are unsure when your rate changes, you will need to speak to the HMRC to confirm this.
If you’re on the VAT Flat Rate Scheme you don’t need to do anything differently when processing your day-to-day accounts. Enter your sales and purchases as normal and choose the appropriate VAT rate. The only exception to this is the purchase or sale of a capital asset worth £2000 or more. For more information, please refer to the following section.
When you create your VAT Return, Accounting automatically excludes the relevant purchases and VAT calculates based on the flat rate percentage you entered.
A message appears on your return advising showing what VAT would have been due if you weren’t on the VAT Flat Rate Scheme and what the difference is. Accounting compares this to the standard scheme and posts the gain or loss to nominal ledger account 4900. You can use this information to see if the VAT Flat Rate Scheme is beneficial to you and whether you’re saving money.
For more detailed information about how the VAT Return calculates, please see our How the VAT Return calculates article.
Normally on this scheme, you don’t reclaim any of the VAT you pay on purchases. However, if you purchase a capital asset worth £2,000 or more including VAT, you may be able to reclaim the VAT element at the standard rate, rather than your flat rate percentage. If you later sell this asset, you then need to ensure the VAT on the sale appears on your VAT Return at the standard rate.
To do this, you need to flag the transaction as outside the scope for the Flat Rate VAT scheme.
- Purchase or sales invoice or credit note – Click the double chevrons for the relevant item line then select the Outside Flat Rate? check box.
- Other payments, receipts or quick entries – Select the Outside Flat Rate? checkbox on the relevant item line.
If you’re not sure whether you can reclaim the VAT or not, HMRC can advise. There’s more information on GOV.UK