VAT Flat Rate Scheme – What is it?

This article is intended as an informative guide to help you gauge a better understanding of yourVAT status. If you require any clarification then please do not hesitate to reach out to your accountant.

What is flat-rate VAT?

The flat rate scheme calculates a flat VAT payable to HMRC based on the gross turnover in a period. For instance, 20 days worked at £500 + VAT, VAT would be payable on £10,000 + VAT = £12,000.

Under the flat rate scheme, input VAT can’t be claimed, unless for the purchase of a fixed asset over the sum of £2,000. Therefore, a Macbook (other computers available!) and total accessories come to £2,050 inclusive of VAT, a deduction of £341.67 would be available on the respective VAT return.

Am I eligible?

Firstly, you must be VAT registered and your turnover must be less than £150,000 net (before VAT) per annum.

Naturally, there are also some exceptions as follows:

  • You left the scheme in the last 12 months.
  • You committed a VAT offence in the last 12 months.
  • You joined (or were eligible to join) a VAT group in the last 24 months.
  • You registered for VAT as a business division in the last 24 months.
  • Your business is closely associated with another business.
  • You’ve joined a margin or capital goods VAT scheme.

Lastly, you will no longer be eligible if on the anniversary of joining the scheme, your gross turnover (including VAT) was more than £230,000 (net £191,667), or you anticipate your turnover to be greater than in the next 12 months.

At what rate do I pay VAT?

The rate in which you pay VAT is based on your business activities (see here) in which you work. Your DJCA accountant will work with you in deciding at which % applies to your business activities.

In the first year HMRC allow a 1% discount, therefore if your percentage is 14.5%, for the first 12 months you will be paying VAT at a rate of 13.5%.

Why is it so great for contractors and freelancers?

In order to show the benefit of the flat rate scheme, here is a working example:

Mr John Smith, who is a recently VAT registered IT contractor and pays flat rate VAT at a rate of 14.5% as per HMRC’s business activity guidance, and worked 60 days in the VAT quarter at a day rate of £500 per day.

Calculation

60 x £500 = £30,000
VAT @ 20% = £6,000
Received = £36,000

VAT payable = £36,000 x 13.5% (14.5% less 1% discount) = £4,860

VAT received = £6,000
Less: payable = (£4,860)
Flat rate surplus = £1,140

The contractor would then benefit by £1,140. However, no purchase VAT other than capital assets over £2,000 can be reclaimed. As a contractor , travel, subsistence, and salaries do not attract VAT so this is very minimal.