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Profit From The Flat Rate VAT Scheme

14 January 2011

It may now be even more beneficial for self employed individuals or smaller businesses with  sales of less than £150,000 (exclusive of VAT) per year to adopt the flat rate VAT scheme. 

What is this scheme?  It was introduced back in 2002, the main driver behind it's introduction being to cut down on the administration headache suffered by small businesses of preparing quarterly VAT returns, particularly those who found it a struggle to keep all their VAT receipts on day to day expenses such as petrol, items of stationery, parking receipts etc...  It also made things easier for the VAT personnel employed by HMRC.

How was this?   Well, instead of having to keep books and records detailing the VAT on each sale and purchase, you are allowed to charge VAT on your invoices at 20% and pay HMRC a much lower amount.  The reason for this is that over the years, HMRC have built up a picture of the typical average expenses of each business type that is eligible to join the scheme and has estimated a reduction in the output VAT rate to match their estimate of the input VAT which a business would claim.  So allowing for typical expenditure on travel, motor expenses, phone bills, insurance etc..  for example, freelance bookkeepers would account for vat at 14.5% of gross turnover, photographers at 11% and so on.

With the recent increases in the output VAT rate, it might be possible for certain businesses to cash in on the flat rate scheme.  The reason for this is that although the standard VAT rate has increased by 2.5%, the maximum flat rate VAT scheme rate has only increased by 1.5%.  As an example, for a management consultant who has £140,000 of net turnover, transferring to the flat rate scheme could be worth anything up to £4,000 extra pre-tax cash in his pocket in the year, depending on the level of his expenses.  So if you have not considered the flat rate scheme before then it may be time to review whether this would be good for you.

Of course, as always, things are not that simple when it comes to tax.  This scheme does not suit everyone as there are drawbacks.  We find it is not particularly well suited for example for our clients who:

  1. tend to buy mostly standard rated items because they are not able to claim back the input VAT on these items (with the exception of certain capital items costing more that £2000)
  2. make a lot of zero rated or exempt sales e.g. if you are a self employed business consultant with a rental property then that rental income, which is normally treated as exempt, would be subject to VAT at 13%


In summary, this scheme may be beneficial for some self employed people or business owners who are not currently registered for it - plus if it is good for you, then once you are registered you can stay in the scheme until your total business income is £230,000. However there are disadvantages to the scheme, only some of which are listed above, so we would advise that you speak to us first so we can help you make that decision on the basis of all the facts.

If you have any queries, contact David Lochhead at

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