Flat-rate VAT scheme
The principle is, for once, easy to understand.
- Most small businesses in a particular trade have much the same expenses as each other.
- Because of this the proportion of VAT they each pay will also be much the same.
- If we know what this proportion is, why bother with actually listing and adding up each and every invoice?
The scheme does just this. You take your turnover, multiply it by the percentage for your trade, and that's what Customs & Excise get.
For example, the rate for restaurants is 10.5% (from December 2008). If your gross sales for the quarter are £22,000, your VAT liability is £22,000 x 10.5% = £2,310. No listing of invoices!
First year discount
For your first year of trading there is a discount of 1%. Not overly generous, perhaps - but 1% of £70,000 is £700. Which is much better than nothing.
Winners & losers
If you normally pay more than the suggested rate, join now! Not only do you pay less VAT, you cut out a lot of hassle.
You may normally pay a little less than the going rate. It might still be worth joining, just to make life easier.
Or you may normally pay much less than the suggested rate. No problem - don't join. It's not compulsory.
Capital items
This is meant to be a rough and ready scheme. It takes into account small capital items.
But there might be times when you need, say, a new van. And the scheme recognises this. If you buy an item of equipment for more than £2,000 you can claim the VAT back as a separate item.
More information
Customs & Excise leaflet 733 flat rate scheme for small businesses gives full details, including the list of percentages to use.
The temporary cut in VAT to 15% from December 2008 means there are changes to the flat rate percentages. Look at the final pages.
The change back to 17.5% VAT from 1 January 2010 means more changes to the flat rate percentages. They are not necessarily the same as before December 2008.