A guide to the U.K.'s flat rate VAT

The U.K. Flat Rate VAT scheme was introduced in the year 2002 and it provides the small businesses in the UK with the chance to simplify VAT accounting. In order for the business to qualify for the scheme, certain requirements must be fulfilled.

• An yearly exclusive VAT taxable turnover of £100,000.

• An yearly VAT exclusive turnover that is inclusive of the value of the exempted supplies and also other incomes that are non taxable up to an amount of £125,000.

• The annual VAT inclusive turnover of the business should not exceed an amount of £150,000. If this happens, the business is required to exit the scheme since it will prove costly.

The working principle

Companies with zero expenses

For example, if the turnover of the business is £51,000, the VAT will be charged as below:

£51,000 x 0.175 = £8,925.

The total revenue will therefore stand at £59,925. The percentage of the VAT flat rate is applied directly to the figure mentioned. For example, if there is an assumption that the flat rate percentage is 15 percent, then the calculation will be as follows: £59,925 x 0.15 = £8,988.75.

The amount of £8,988.75 must be paid of to the HM customs and Excise as tax. Notably, there is a difference of £63.75 between the total amount that is charged for the supply of the services and goods (£8,925) and the amount that is paid in the form of tax (£8,988.75). This implies that if the company has got minimal or no expenses, it would have gained £63.75 by the close of the financial year.

Companies with several expenses

In the situation whereby the company has got numerous expenses during the year, it is wise to avoid the VAT Flat Rate Scheme. This is due to the fact that the business would be in a position to offset the VAT that was paid on the costs against the amount of VAT that was received for supplies of both services and goods.

For instance, if the company makes a sales turnover of £50,000 and incurs expenses of £15,000, the expenses will be as follows:

£15,000 plus £2,625 = £17,625

It is possible to offset the figure of £2,625 against the amount of £8,988.75 that was charged for services and goods.

The £2,625 can be offset against the £8,750 of VAT charged for the supply of goods or services: £8,925 - £2,625 = £6,30. Therefore, the amount of money that is paid out in form of tax would be £6,125. This figure is less that the £8,988.75 that was paid as the VAT Flat Rate that was shown in the example. In such a situation, the company should avoid being in part of the Flat Rate VAT Scheme.

It is therefore important for the company to seek the services of professionals who are better placed to provide the best advice about VAT tax related issues. Otherwise, without a clear understanding of how the figures are arrived at, it may become rather difficult to make the best decision.

About the author: Isaac writes for Drummond Bookkeeping & Accountancy Services LLP, Drummond provide their services to the wider South West region but focus on providing bookkeeping in Plymouth for small and medium sized businesses.