At first glance, VAT can seem like one more aspect of your business that adds to your administrative tedium. Yet, as a small business owner, you want to run your business in the most tax efficient way possible - and VAT is a common area where business owners are losing out.
Even if you've hired an accountant, you need to have a good grasp of the essentials.
Below, we'll dive into an aspect of VAT that business owners often raise questions about the flat rate VAT scheme. We'll run through the basics, touch on recent regulatory changes and share our answers to frequently asked questions about the scheme.
A brief introduction: What is VAT?
Most of us are familiar with, or have a basic understanding of VAT (Value Added Tax). It's a type of consumption tax added to the cost of most goods and services for both B2C and B2B markets.
What is the flat rate VAT scheme?
There are various VAT schemes that business owners can register for. Among these schemes, the standard rate VAT scheme and flat rate VAT scheme are commonly used by small businesses.
Under the standard rate VAT scheme, you need to sum up the VAT you've charged to your clients, and deduct the VAT you've paid on goods and services purchased.
You'll pay the difference between the VAT you charge to your clients, and the VAT you pay on your purchases. This calls for rigorous record keeping, as you need to keep track of all transactions and the rate of VAT charged.
With the flat rate VAT scheme, the process is simplified. Rather than pay out the difference between the VAT you've charged to your clients and the VAT on your purchases, you'll pay HMRC a fixed rate of VAT.
The scheme is rolled out for small businesses that don't have a large turnover, thereby saving them from the hassle of tracking VAT on purchases. To be eligible for the scheme, businesses need to have an annual turnover of £150,000 or less (excluding VAT).
The amount of VAT payable under the flat rate VAT scheme depends on the industry you operate in.
We've included a full list of the current VAT flat rate below. Due to the COVID-19 outbreak, the flat rate for catering (including restaurants and takeaways), accommodation and pubs has been reduced until 31 March 2022.
This information is also available on the Gov.uk website.
- Accountancy or book-keeping services: 14.5%
- Advertising businesses: 11%
- Agricultural services: 11%
- Any other activity not listed elsewhere: 12%
- Architect, civil and structural engineer or surveyor: 14.5%
- Boarding or care of animals: 12%
- Business services not listed elsewhere: 12%
- Catering services including restaurants and takeaways before 15 July 2020: 12.5%
- Catering services including restaurants and takeaways between 15 July 2020 and 30 September 2021: 4.5%
- Catering services including restaurants and takeaways between 1st October 2020 to 31st March 2022: 8.5%
- Computer and IT consultancy or data processing: 14.5%
- Computer repair services: 10.5%
- Entertainment or journalism: 12.5%
- Estate agency or property management services: 12%
- Farming or agriculture not listed elsewhere: 6.5%
- Film, radio, television or video production: 13%
- Financial services: 13.5%
- Forestry or fishing: 10.5%
- General building or construction services: 9.5%
- Hairdressing or other beauty treatment services: 13%
- Hiring or renting goods: 9.5%
- Hotel or accommodation before 15 July 2020: 10.5%
- Hotel or accommodation from 15 July 2020 and after 30 September 2021: 0%
- Hotel or accommodation between 1 October 2021 and 31 March 2022: 5.5%
- Investigation or security: 12%
- Labour-only building or construction services: 14.5%
- Laundry or dry-cleaning services: 12%
- Lawyer or legal services: 14.5%
- Library, archive, museum or other cultural activity: 9.5%
- Management consultancy: 14%
- Manufacturing fabricated metal products: 10.5%
- Manufacturing food: 9%
- Manufacturing not listed elsewhere: 9.5%
- Manufacturing yarn, textiles or clothing: 9%
- Membership organisation: 8%
- Mining or quarrying: 10%
- Packaging: 9%
- Photography: 11%
- Post offices: 5%
- Printing: 8.5%
- Publishing: 11%
- Pubs before 15 July 2020: 6.5%
- Pubs between 15 July 2020 to 30 September 2021: 1%
- Pubs between 1 October 2021 to 31 March 2022: 4%
- Real estate activity not listed elsewhere: 14%
- Repairing personal or household goods: 10%
- Repairing vehicles: 8.5%
- Retailing food, confectionery, tobacco, newspapers or children's clothing: 4%
- Retailing pharmaceuticals, medical goods, cosmetics or toiletries: 8%
- Retailing not listed elsewhere: 7.5%
- Retailing vehicles or fuel: 6.5%
- Secretarial services: 13%
- Social work: 11%
- Sport or recreation: 8.5%
- Transport or storage, including couriers, freight, removals and taxis: 10%
- Travel agency: 10.5%
- Veterinary medicine: 11%
- Wholesaling agricultural products: 8%
- Wholesaling food: 7.5%
- Wholesaling not listed elsewhere: 8.5%
Changes in the flat rate VAT scheme
HMRC introduced regulatory changes in April 2017 to combat the abuse of the scheme, and ensure that all businesses are paying the required taxes.
A new flat rate category, known as the 'limited cost trader' was introduced to remove the cash advantage for businesses with limited costs.
Limited cost trader flat rate VAT scheme
You're classified as a 'limited cost business' if your goods cost less than either:
- 2% of your turnover
- £1,000 a year (if your costs are more than 2%)
If you meet the criteria for a 'limited cost business', you're required to pay a higher rate of 16.5%. This will likely affect many 'labour-only' businesses, but if you're still unsure about whether you fall under this category, you can work this out using the Gov.uk VAT flat rate calculator.
Commonly asked questions about the flat rate VAT scheme
1. What are applicable goods under the limited cost trader test?
Items that aren't considered applicable goods include:
- Accountancy fees
- Advertising costs
- Costs of food and drink for you or your staff members
- Electronically downloaded services, such as a magazine subscription
- Equipment rental
- Laptop or mobile phone for use by the business
- Software that you've downloaded
- Office rental expenses
- Bespoke software
Do note that this isn't a definitive list, and we recommend checking in with our accountants at Forma on any items that you're unsure about.
2. How often do I need to apply the limited cost trader test?
The test will need to be completed each time you complete a VAT return.
That's because you can fall into and outside of the limited cost trader flat rate category, if your costs fluctuate around the 2% mark.
3. Does the 1% discount apply to limited cost businesses in their first year as a VAT-registered business?
Yes, this has been confirmed by HMRC