Standard rate VAT vs Flat Rate VAT

What is a VAT registration threshold?

The current VAT registration threshold for businesses is £85,000 (as of 2022). This means that if you expect to go over or are doing to go over the threshold you must register for VAT.

How can I register for VAT?

You can usually register for VAT through your online gateway account for the company. You would have created this when you incorporated the company, if you don’t have one, you can register for one (it usually takes 5 minutes to do so).

Another way you can register is by asking your agent (accountant) to register for you or if nothing else works you can register by post by completing a VAT1 form.

What is the standard VAT scheme?

In accordance with the standard VAT scheme, you would ordinarily submit a quarterly VAT return in which you will disclose the VAT on your sales as well as the VAT on your expenses. You will then pay HMRC the difference of the two. For example, lets say you made sales of £1,000 + vat and your expenses were £100 + vat for the same period. The VAT on sales will be £200 and the VAT on expenses will be £20, the difference between the two is £180 and that will be due to HMRC one month as seven days after your VAT quarter.

What is the flat rate scheme?

The HMRC VAT flat rate was implemented by HMRC to streamline VAT returns. On your invoices, you continue to charge regular rates VAT to your customers, so they don’t notice anything unusual, however what you report to HMRC is different. If we take the above example of £1,000+vat sales. The customer will receive the invoice for £1200 gross but what you report to HMRC is £1,200 (amount including VAT) x flat rate percentage (let’s assume 12% in this case). So the total amount payable to HMRC is £1,200 x 12% = £144. As you can see there is potential saving for using the scheme.
Here is a link to a list of HMRC flat rate rates, that are based on the type of business you are:

VAT Flat Rate Scheme : Work out your flat rate – GOV.UK (www.gov.uk)

What are flat rate VAT drawbacks?

If you have a significant amount of VAT on your expenditures, the flat rate VAT might not be the best option for you because you cannot claim VAT back on your costs while on it. One exception to this rule is that you can use the flat rate plan to recoup the VAT if you make a single purchase of capital goods or equipment that cost £2,000 or more in total including the VAT.

If you are a limited cost trader (generally a business with expenses less than 2% of their VAT-inclusive sales) you need to apply 16.5% flat rate percentage. This significantly reduces any savings you may have had in the past on being on flat rate and you are still restricted in claiming back VAT on any purchases below £2,000.

If you expect your turnover to be over £150,000 over the next twelve months you are not allowed to join the scheme. Also if your turnover goes over £230,000 including VAT you will have to leave the scheme.