Fairhurst Accountants weigh up whether the VAT Flat Rate Scheme could help your small business or not

If you are a small VAT-registered business, how you calculate your VAT could make a real difference to your cash flow and the time you spend keeping records.

For some small businesses, the VAT Flat Rate Scheme offers a simpler route. It aims to make VAT accounting easier, not guarantee a saving, and its value depends on your trade and spending.

How does it work?

Under the standard method, you charge VAT on sales, reclaim VAT on eligible purchases and pay the difference to HM Revenue & Customs (HMRC).

The Flat Rate Scheme takes a different approach. You pay HMRC a fixed percentage of turnover, including VAT, and generally cannot reclaim VAT on purchases. The percentage depends on your sector and whether the limited cost business rules apply.

Could your business qualify? You may be able to join if your expected VAT-taxable turnover for the next 12 months is £150,000 or less, excluding VAT, although other exclusions apply.

Could it save time or money?

The scheme can reduce administration and sometimes lower the VAT bill. But businesses spending relatively little on goods may have to use a higher prescribed rate, reducing or removing any saving. This can be particularly relevant to consultants and other service businesses.

VAT is not normally reclaimed on purchases, although an exception may apply to a single purchase of qualifying capital goods costing £2,000 or more, including VAT. Services and some assets do not qualify.

If a business joins the scheme during its first year of VAT registration, a reduced flat rate may apply until the first anniversary of its VAT registration.

When the standard method may be better

If your business regularly buys goods or services with VAT on them, reclaiming VAT through the standard method is often more cost-effective. The same can be true if you regularly make larger purchases.

Do the sums before you decide

The best way to be sure which method is right for you is to run the numbers and compare.

If you would like advice on whether the Flat Rate Scheme is right for you, please contact your accountant who will be able to help.