Calculate the differences between standard rate and flat rate VAT and what impact this can have on your business.
In the UK, the standard VAT (Value Added Tax) scheme and the flat rate VAT scheme are two different methods of accounting for and paying VAT to HM Revenue and Customs (HMRC). These schemes have different rules and calculations. Here's an overview of each scheme and how they are calculated.
Standard VAT Scheme
How standard rate VAT works
- Under the standard VAT scheme, businesses calculate VAT based on the actual amounts of VAT they charge on their sales (output VAT) and the VAT they pay on their purchases (input VAT).
- Businesses must keep detailed records of all their VAT transactions, including invoices and receipts, and report these to HMRC in their VAT returns.
Standard rate VAT calculation
- Calculate Output VAT: This is the VAT charged on your sales to customers.
- Subtract the VAT on any sales returns or discounts from your total output VAT.
- If you're on the accrual basis, include VAT on invoices issued but not yet paid.
- Calculate Input VAT: This is the VAT paid on your business expenses and purchases.
- Subtract the VAT on any purchase returns or discounts from your total input VAT.
- If you're on the accrual basis, include VAT on invoices received but not yet paid.
- Submit VAT Return: Usually, VAT-registered businesses submit their VAT return every quarter (or monthly for some businesses).
- Report the calculated output VAT and input VAT on your VAT return.
- Pay the difference to HMRC if your output VAT exceeds your input VAT. If your input VAT is higher, you can claim a refund or carry it forward to the next VAT period.
Flat Rate VAT Scheme
How flat rate VAT works
- The flat rate VAT scheme is a simplified method for small businesses. Instead of calculating VAT based on the actual VAT incurred and charged, businesses apply a fixed percentage to their gross (total) sales to determine the VAT owed to HMRC.
- Businesses under this scheme do not need to keep detailed records of input and output VAT for most purchases and sales.
Flat rate VAT calculation
- Determine the Applicable Flat Rate Percentage: Different industries have different flat rate percentages assigned by HMRC. You must choose the rate that corresponds to your business activity.
- Calculate VAT Owed: Multiply the flat rate percentage by your gross sales (including VAT). This gives you the total VAT owed to HMRC.
- VAT Owed = Gross Sales (including VAT) x Flat Rate Percentage
- Submit VAT Return: Report your gross sales and the calculated VAT owed to HMRC in your VAT return.
- Keep Records: You are not required to keep detailed records of input and output VAT on most transactions. However, you should still keep records of your sales and purchases for your business accounts.
It's important to note that while the flat rate VAT scheme simplifies VAT calculations, it may not be the most cost-effective option for all businesses. Depending on your industry and expenses, you may or may not benefit from this scheme. Businesses should carefully consider their circumstances and possibly seek advice from an accountant to determine which VAT scheme is most suitable for their needs.