If using the VAT Flat Rate scheme, businesses pay VAT as a fixed percentage of their VAT inclusive turnover. The actual percentage used depends on the type of business. The scheme has been designed is to simplify the way a business accounts for VAT and in so doing reduce the administration costs of complying with the VAT legislation.
The scheme is open to businesses that expect their annual taxable turnover in the next 12 months to be no more than £150,000, excluding VAT. The annual taxable turnover limit is the total of everything that a business sells during the year. It includes standard, reduced rate, or zero rate sales and other supplies. It excludes the actual VAT charged, VAT exempt sales, and sales of any capital assets.
A limited cost trader test was introduced in April 2017. Businesses that meet the definition of a ‘limited cost trader’ are required to use a fixed rate of 16.5% for the scheme. Businesses defined as limited cost traders may find it more beneficial to leave the scheme and account for VAT using traditional VAT accounting.
HMRC’s guidance on the scheme has been updated. The update states that from 1 June 2022, businesses registered under the Flat Rate Scheme should no longer include imports accounted for under postponed VAT accounting within their flat rate turnover. These should be accounted for separately, outside the Flat Rate Scheme.
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