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The VAT Flat Rate is a scheme designed to simplify the amount of tax UK businesses pay to the HMRC.

Instead of paying the difference between the VAT you’ve charged to customers and how much you’ve claimed back, a flat rate is owed as an alternative.

This flat rate depends on your business type and income, effectively known as a percentage of your ‘flat rate turnover’. It can still be tricky to calculate and although the government website has more information, it’s best to seek professional guidance to remain tax-efficient.  

How VAT Flat Rate Works

The Flat Rate scheme was introduced to make paying VAT easier for SMEs. It was designed so the HMRC would still receive roughly the same amount as it would do usually. How much you pay depends on your business type, details of which can be found here.

If your flat rate percentage is set at 12%, this makes it far simpler to work out the VAT. As an example, a sale worth £120 (including VAT) will require a payment of £14.40 owed to the HMRC. This is calculated by taking the sale price of £120, multiplying by the flat rate of 12% and then dividing by 100.

Businesses can only join the scheme with a turnover, or expected turnover, of below £150,000 in the next 12 months. You can stay registered until turnover rises above £230,000.  

You can’t reclaim on the cost of business purchases, except for certain capital assets over £2,000. As a bonus, the flat rate is reduced by 1% during the first year of using the scheme.

2017 Flat Rate Changes

To counter abuse of the Flat Rate scheme, the chancellor’s Autumn statement revealed changes for businesses with a low-cost base.

With effect from 1 April, the flat rate charge will now be set at 16.5% for these ‘limited cost traders’. So now, a sale worth £120 (including VAT) will result in £19.80 being owed to the HMRC.

Limited cost traders are defined as those that spend less than 2% on goods. Services are exempt from the criteria, as well as the purchase of some capital goods, food and drink for staff, and company vehicles.  

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How the VAT Flat Rate Can Help Your Business

Much depends on your business type, although many limited cost traders enrolled in the Flat Rate VAT scheme will now pay more in tax. However, some companies may face no additional costs at all, whilst some may even be better off.

The best course of action is to determine how much VAT you’ll pay the standard way as opposed to the flat rate. If there’s any benefit for using the flat rate, and your business fits the criteria, it’s often recommended to join the scheme.

However, the new 16.5% tariff set for April may negate the possible financial benefits. Many smaller companies and those who don’t spend too much on goods may be better off reverting back to the normal VAT rate.

As a business owner, you must ensure the correct VAT rate is presented on your tax returns. With the new Flat Rate scheme changes, combined with the digital tax makeover currently being phased in, it’s advised to seek a specialised accountancy firm to ensure no costly errors are made.


If you would like to talk to a professional about your business’s VAT, contact us for a chat.

Quarterly digital tax returns are another big change coming soon. Find out how it might realistically affect your business.