VAT (Value added tax)is a consumption tax charged on almost all goods and services bought or sold across the UK and EU. Any business whose annual turnover crosses the VAT threshold of £90,000 within a 12-month period must register for VAT with HMRC. This guide dives into discussing all the features and obligations that come with understanding what is the VAT flat rate scheme for the self-employed.
VAT-registered businesses are liable to charge VAT on their sales and can reclaim VAT on their purchases. Notably, this process entails accurate record-keeping of all sales and purchases of the products or services and the VAT rate they were charged.
Fortunately, to facilitate the VAT-registered firms in efficiently managing their tax obligations, the UK government introduced various VAT schemes aimed at simplifying tax compliance for businesses.
Furthermore, these schemes facilitate VAT collection, reporting, and payment, making it easier for small businesses to ensure compliance while also reducing administrative burdens. One such scheme is the VAT Flat Rate Scheme (FRS), which particularly benefits self-employed individuals and small businesses.
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What is the VAT flat rate scheme for the self-employed?
At its core, The VAT Flat Rate Scheme simplifies VAT calculations by applying a fixed percentage to a business’s turnover instead of needing detailed VAT tracking or accurate records for each sale and purchase.
To go into detail, the HMRC flat rate scheme reduces the burden of maintaining correct record-keeping on smaller businesses, such as those run by self-employed individuals.
By principle, the VAT bill (the VAT owed) is the difference between the VAT you charge to customers and the VAT you pay for your purchases. For instance, the VAT due is calculated based on the difference between the invoices you issue (output VAT) and the invoices you receive (input VAT).
On the contrary, the VAT Flat Rate Scheme replaces this calculation by finding the difference between the output and input VAT. Instead, under this scheme, businesses pay a fixed percentage of only their sales (including any VAT charged to consumers) to HMRC. Thus, small businesses are spared the hassle of keeping track of VAT on their purchases.
How does a flat rate scheme work for the self-employed?
Now, let’s try to understand what is the VAT flat rate scheme for the self-employed from another perspective to give you clarity.
When self-employed individuals sign up for the Flat Rate Scheme, they follow the usual process of charging VAT to their customers on the products or services they sell. Likewise, they pay VAT to their suppliers to purchase business-related goods in the normal way.
Now, you must be wondering where the difference occurs.
The change comes when it is time to pay VAT to HMRC and prepare your VAT returns. To illustrate, when you pay VAT owed, instead of adding up all the VAT you charged (output VAT) and deducting the VAT you paid on purchases (input VAT), you will add up all your sales that make your gross turnover, including any VAT you charged consumers.
Lastly, you will apply a flat rate percentage to those sales and pay the resultant amount to HMRC. Take note that the percentage you will apply to your sales will depend on the nature of your business.
Much to your relief, HMRC directives state that if you are in your first year as a VAT-registered business, you will receive a 1% discount.
Subsequently, under the VAT flat rate scheme, you will apply a fixed flat rate percentage to your gross turnover and pay a fixed rate of VAT to HMRC. Eventually, the flat rate scheme not only allows eligible businesses to save time but also ensures accurate VAT reporting.
What is the eligibility criteria to join the VAT Flat Rate Scheme?
Determining the eligibility criteria for joining the scheme is vital when learning what is the VAT flat rate scheme for the self-employed. Thus, be mindful of the following criteria before you apply for the scheme:
- First and foremost, in order to avail yourself of the flat rate scheme’s benefits, it is crucial that your business is VAT-registered.
- Next, your business’s annual taxable turnover is £150,000 or less (excluding VAT). Moreover, even if you expect your VAT-taxable turnover to reach £150,000 or less in the next 12 months, you can apply for the scheme. It might be relevant to mention that VAT taxable turnover refers to the total of all sales, excluding VAT-exempt sales.
- Once you establish your eligibility to join this scheme, instead of working out how much VAT you are owed, you will viably pay HMRC the fixed percentage of your VAT-inclusive turnover.
- However, you must ensure that your business has not joined the scheme within the last 12 months, nor does it use the VAT Cash Accounting Scheme.
- Not have been in the scheme within the last 12 months.
- More importantly, if your business’s annual turnover exceeds £230,000 (including VAT) at any point, you can no longer be a part of the flat rate scheme. As a result, you must exit the scheme.
- Lastly, HMRC maintains a list of the applicable percentages for the flat rate scheme based on different industries and businesses. Hence, you can determine the percentage that best suits your business nature and structure.
How to apply for the VAT Flat Rate Scheme?
HMRC has both the online and paper versions to join the VAT Flat Rate Scheme. To go into detail, self-employed individuals can apply for the VAT Flat Rate Scheme online through their HMRC VAT online account when they first register for VAT.
Alternatively, you can fill in the VAT600FRS and submit it to HMRC via email or post
Once you have joined the scheme, HMRC will send you a confirmation through your VAT online account or through the post if you did not apply online.
Apart from that, to apply for the scheme, self-employed individuals need to provide relevant business details, such as:
- The business name, which is the same as on your VAT Certificate of Registration.
- Business address, where you conduct your core business activities.
- Contact details through which HMRC can contact you regarding your application.
- Your VAT registration number. If it is unknown, you can also enter the reference number for your VAT registration application.
- Flat rate percentage applicable as per your business. It is essential that you identify the correct percentage in line with your business before filling out the VAT600FRS form.
- Start date, which usually begins from the start of the VAT period after the HMRC receives your application.
To know more of what details you need to provide in your flat rate scheme application, visit the government website.
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Weigh the pros and cons of a flat rate scheme for the self-employed:
Despite coming to grips with everything about what is the vat flat rate scheme for the self-employed, it is always rational to weigh the ups and downs before reaching a conclusion as to whether or not you should apply for the scheme.
Advantages:
- To begin with, under the VAT flat rate scheme, your VAT calculations become simplified, and no complex calculations are required to work out. Subsequently, there is no need at all to keep track of VAT on individual sales and purchases.
- Next, The flat rate is a time-saver scheme, reducing your administrative burden and paperwork.
- Similarly, it also leads to potential cost savings since some businesses end up paying less VAT compared to the standard VAT scheme after applying the flat rate percentage.
- Additionally, new businesses enjoy first-year discounts and make extra savings because if they are in their first year as a VAT-registered business, they will receive a 1% discount.
- Lastly, you can keep the difference between output and input VAT instead of paying it to HMRC.
Disadvantages:
- While you can keep the difference owed to HMRC, you cannot claim VAT back on your business-related purchases as well once you join the VAT flat rate scheme, except for capital assets over £2,000.
- Next, you must exit this scheme if your gross turnover exceeds £230,000. Therefore, any financial growth beyond this limit would mean you will have to switch to the standard VAT scheme.
- Likewise, if a self-employed individual is running a high-expense business, they are likely to incur significant VATable expenses. Consequently, under such circumstances, the VAT flat rate may not be a cost-effective option.
- Finally, some businesses might encounter difficulty in finding or determining the right percentage for the flat rate, as a result of which HMRC can challenge you upon applying the wrong rate.
Final word:
In brief, understanding what is the VAT flat rate scheme for the self-employed is a simplified way to manage your VAT obligations. However, while the flat rate scheme is considerably advantageous in reducing paperwork and potential cost savings, it may not be suitable for all self-employed individuals to sign up for.
In this regard, it is advisable to seek help from a professional accountant, such as those registered with Accountingfirms, who will guide you through the scheme’s requirements, benefits, and limitations so you can make informed decisions. What’s more, a certified accountant can adeptly deal with your business VAT registration and HMRC compliance.
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Disclaimer: The information provided on AccountingFirms.co.uk is for informational purposes only and should not be considered as financial advice. Always consult with a professional accountant to ensure compliance with UK laws and regulations.