Flat Rate Scheme

The Flat Rate Scheme is designed to make VAT accounting easier for businesses that have few or no purchases. There are restrictions to the operators of these schemes, outside the scope of this help article. You must apply to HMRC to use this scheme. Consult your accountant beforehand.

Essentially, all sales are made with VAT at standard rate.  Purchases are ignored when completing the VAT return and the VAT liability is calculated at the agreed percentage for your industry.  The percentage is applied to gross sales.  For example, if sales of £20,000 are declared with VAT charged of £4,000 (20%) and the agreed flat-rate percentage is 13.5%, the output VAT to be reported is 13.5% of £24,000 = £3,240. This value is entered in box 1 and the sales shown in box 6 is £20,760.

There are, of course, rules and exceptions to be applied – here are some.

1. For the first year of registration, a 1% reduction in the VAT rate is granted.  Note that this is from the date of registration, not from the date of joining the Flat Rate Scheme.

2. Assets purchased that cost more than £2,000 including VAT can be included in box 4, analysing the net and VAT amounts accordingly.  Note that assets that are purchased for rental or hire income are not fixed assets and input VAT cannot be claimed. See below for suggested VAT codes to use.

3. In the first VAT return only, input tax can be added to box 4 for items purchased pre-registration – up to four years before the VAT registration date for goods purchased that are still in the businesses possession, and up to six months before the registration date for services.

4. Care must be taken with businesses that have other income – whether normally exempt or not.

5. To join the scheme, your income must be expected to be under £150,000 including VAT for the next 12 months.  If your turnover exceeds £230,000 including VAT you must leave the scheme.

6. You can leave the scheme at any time, for example if it is no longer beneficial to remain in the scheme.

7. As normal purchases are ignored for this scheme, there is no requirement to keep copies of their supporting documents.

8. The VAT flat rate to apply will depend on the nature of your business and will be determined by HMRC when you apply to join the scheme. If you spend a small amount on goods for your business (no more than 2% of your gross annual turnover or £1,000 including VAT per year if your costs are more than 2%), you can be classified as a limited cost business and apply a higher rate of 16.5%.  Otherwise, the rate to apply will depend on the industry your business is in.  The following HMRC webpage explains more:

https://www.gov.uk/vat-flat-rate-scheme/how-much-you-pay

9. The Flat Rate scheme cannot be used in conjunction with any other scheme.

If you are unsure about any of this, you should consult your accountant.

Configuration: Select ‘Flat Rate scheme‘ in VAT parameters and enter the appropriate VAT rate percentage for a limited cost business, or for your industry, remembering to apply the 1% reduction in the first year, if applicable.  You must remember to change the rate at the end of your first year.  When you process a VAT return, the adjustments will be made automatically and posted as journals to affect your sales and VAT liability.

The suggested and predetermined VAT codes to be used for transactions are as follows:

• VAT code 1 for all sales, to be processed at the standard rate – Variable code
• VAT code F for all purchases that are allowable  – Capital, Pre-registration – Fixed Code
• VAT code N for all other purchases – 0% – use to test for continued eligibility as a limited cost business – Fixed Code