If using the VAT Flat Rate scheme, businesses pay VAT as a fixed percentage of their VAT inclusive turnover. The actual percentage used depends on the type of business. The scheme has been designed to simplify the way a business accounts for VAT. Additionally it was created to reduce the administration costs of complying with the VAT legislation.
The scheme is open to businesses expecting their annual taxable turnover over 12 months less than £150,000, excluding VAT. The annual taxable turnover limit is the total of everything that a business sells during the year. It includes standard, reduced rate or zero rate sales and other supplies. It excludes the actual VAT charged, VAT exempt sales and sales of any capital assets.
As part of an annual review, businesses using the flat rate scheme should ensure they still meet the qualifying criteria. Businesses that have enrolled in the scheme can maintain their participation, provided that their total business income does not surpass £230,000 in a 12-month period. Special rules apply in cases where increased turnover is temporary.
In April 2017, the limited cost trader test introduced a fixed rate of 16.5% for businesses meeting its definition. Businesses falling under the limited cost trader category might discover greater benefits by opting out of the flat rate scheme and instead utilizing traditional VAT accounting methods.
There is also a first-year discount for businesses in their first year of VAT registration of 1%.