Is the VAT Flat Rate Scheme the best option for your company?

VAT stands for Value Added Tax.

VAT (value-added tax) is a levy on consumer purchases of goods and services. If a VAT-registered business sells a widget for £1, the consumer will be charged £1.20. (assuming the 20 percent rate applies).

They will subsequently submit a VAT Return to the government, usually on a quarterly basis, to report the VAT they have collected.

The majority of things sold by businesses are subject to VAT. This is normally the standard rate of 20%, however for certain items, a reduced rate of 5% is used, and there is also a zero rate. The latter isn't the same as VAT-free, because any zero-rated item must still be recorded in your VAT records).

The current taxable turnover criterion for determining whether a company must register for VAT is £85,000.

The business must then begin accounting for both the output VAT (what they charge on their sales) and the input VAT (what they charge on their purchases) (what they pay in purchases). What you pay to the government and declare in the VAT Return is the difference between input and output VAT.

The VAT Flat Rate Scheme is explained in detail.

Since the 2002 Budget, the HMRC VAT Flat Rate Scheme for small enterprises, particularly smaller limited corporations, has been in place.

It's a simplification designed to alleviate some of the administrative work of preparing VAT returns for small businesses.

Rather than accounting for input and output VAT, you just pay a flat amount based on your total revenue. Depending on what you perform, this rate varies.

For enterprises judged to be limited cost dealers, there is also a higher flat rate of 16.5 percent. This was enacted to punish anyone who the government believed were misusing the plan. Because these companies spend so little money on goods, they have extremely little comparable input VAT.

However, if you wish to simplify VAT accounting, it's still an option to examine.

A limited cost trader is one whose VAT-inclusive goods expenditure is less than 2% of their VAT-inclusive turnover in a specified accounting period, or larger than 2% of their VAT-inclusive turnover but less than £1,000 per year.

Is the VAT Flat Rate Scheme applicable to my company?

Your business must be VAT-registered and predict a VAT taxable turnover of £150,000 or less (minus VAT) in the next 12 months to be eligible for the VAT Flat Rate Scheme.

If your turnover was more than £230,000 (including VAT) in the previous 12 months or is expected to be in the next 12 months on the anniversary of joining the flat rate tax system, you must depart.

Alternatively, if your revenue (without VAT) is less than £85,000. you may want to cancel your VAT registration.

The imposition of a higher flat rate of 16.5 percent in 2017 may have lessened the VAT Flat Rate Scheme's appeal to small firms.

However, if you want or need to become VAT-registered, you should carefully examine whether it would be better for you to join up for the programme rather than the Standard VAT Accounting Scheme.

What impact does MTD have on the flat rate scheme?

The requirements for MTD for VAT are also a little easier than those for conventional VAT accounting, just as the flat rate system intends to simplify VAT accounting.

You only need to keep a small number of digital records. You don't need to retain digital recordings of the following:

Purchases, unless they're capital expenditures for which you'll be claiming input tax.

Relevant items are used to assess if the restricted cost business rate is required.