Value Added Tax (VAT)

A quick overview of the vat flat rate calculation

This is an outline for full details read HMRC Notice 733.

Take professional advice on whether the flat rate is suitable for your business.

Eligibility to join the flat rate scheme

Small businesses with an expected taxable turnover of £150,000 (excluding VAT) or less. The limit was £100,000 up to 9th April 2003).

Turnover, for this purpose, is calculated NET of VAT, but it includes all taxable supplies at standard rate, reduced rate and zero rate.

Do not confuse the turnover test for joining the scheme with the turnover on which flat rate VAT is calculated!

You must leave the scheme if  the VAT inclusive supplies in a year exceed £230,000. (there are other rules on leaving the scheme).

Turnover on which VAT is calculated

The flat rate percentage is applied to the VAT INCLUSIVE turnover ie gross sales.

You must ALSO INCLUDE any zero rated or exempt sales.

Also included are goods supplied to to customers outside the UK.

Supplies of services abroad can be complicated. Generally supplies of services to business customers in the EU or any customer outside the EU are not included in the flat rate turnover - you should always check specific supplies.

VAT calculator

Use our vat calculator for flat rate vat calculationFor an outline of the flat rate calculation have a look at our VAT calculator <click here>

Purchase of capital assets (goods)

If a capital asset with a VAT inclusive value of £2,000 or more is purchased then input tax may be recovered in the normal way.

Sales of capital assets (such as equipment)

If input tax was recovered, when the assets were purchased, then VAT has to be charged 'in the normal way' on the proceeds of sale.

If input tax was not recovered then the proceeds are included in the 'flat rate turnover'. (Watch out for sales of motor vehicles).

Choosing the flat rate

This depends on the trade sector or the main trade sector which most closely reflects the business activity. It is necessary to decide upon the ‘main business activity’ of the business and apply the relevant percentage.

See our help sheet for choosing your trade sector

The balance between trade sectors should be reviewed on each anniversary of joining the scheme.

If the business stops making sales in a sector or starts in a new sector, the percentage from then on is sector in which it expects to make the largest sales.

If you change the flat rate

You should write to HMRC about the change within 30 days.

New businesses

New businesses should apply a 1% deduction to the relevant flat rate at any point during their first year of VAT registration.

New businesses: stock and assets

A business newly registering for VAT and starting to use the flat rate scheme can reclaim the input tax incurred on stock and assets on hand at the time of registration in the normal way



Acquisition tax on goods from other EU members

The business still has to account for acquisition tax in box 2 of the VAT return. Input tax is, generally, not recoverable because the flat rate scheme is being used.

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