VAT is tax paid on the majority of goods and services in the UK. To charge and reclaim VAT the company needs to opt into a VAT scheme. In 2018, if a company’s taxable turnover is above £85,000 registration is compulsory.
What is the Flat Rate VAT scheme?
In a nutshell if you register for the Flat Rate VAT scheme, VAT is charged on your invoices, but you will only pay back to HM Revenues and Customs (HMRC) a lower rate than the current VAT threshold which is currently 20%.
If you Invoiced your client for, £4,000, you would charge VAT of £800 on this invoice. The total the client would then need to pay is £4,800. If your Flat Rate VAT percentage is 16.5% you would only be expected to pay HMRC £660, leaving you with a VAT profit of £140.
As you cannot claim VAT back on day to day purchases, this £140 “profit” is seen as compensation for the VAT you’re unable to claim. If you’re purchasing more than a few items per month your accountant may recommend you move to the standard VAT scheme.
What changes were made to the scheme in April 2017?
Before 2017 there were a numerous Flat Rate VAT bands which were based on your company’s SIC code. Though these bands do still exist, most limited company contractors will fall into a new band that was created called a limited cost trader, which currently is 16.5%.
What is a limited cost trader?
A cost trader is a limited company that’s primary function is to trade services not goods. In HMRC terms this means in a quarter i.e. every 3 months their spend on applicable goods including VAT are either:
- less than 2% of its VAT-inclusive sales for that quarter,or
- more than 2% of its VAT-inclusive sales for that quarter, but less than £250
If you are classified as a cost trader your Flat Rate VAT Rate would be 16.5%.
What is classified as non applicable goods
When calculating your spend on goods, there are certain goods that are excluded from applicable goods, some examples of these are:
- Food and drink for the business or its staff
- Capital goods for example new equipment used in your business, such as a laptop
- Accountancy fees
- Any electronic purchases, such as software
- Office rent
- Marketing costs
- Vehicles, vehicle parts and fuel (unless your business uses its own vehicles in the transport business, for example if you run a taxi hire firm)
It is recommended you speak to your accountant to confirm if your purchase is included as an applicable good.
Flat Rate VAT rates for non cost traders
As of April 2018, the following rates would apply, if you’re not classified as cost trader. It is always recommended you speak to your accountant to confirm your VAT flat rate
|Type of business||Current VAT flat rate (%)||Type of business||Current VAT flat rate (%)|
|Accountancy or book-keeping||14.5||Manufacturing not listed elsewhere||9.5|
|Advertising||11||Manufacturing yarn, textiles or clothing||9|
|Agricultural services||11||Membership organisation||8|
|Any other activity not listed elsewhere||12||Mining or quarrying||10|
|Architect, civil and structural engineer or surveyor||14.5||Packaging||9|
|Boarding or care of animals||12||Photography||11|
|Business services not listed elsewhere||12||Post offices||5|
|Catering services including restaurants and takeaways||12.5||Printing||8.5|
|Computer and IT consultancy or data processing||14.5||Publishing||11|
|Computer repair services||10.5||Pubs||6.5|
|Entertainment or journalism||12.5||Real estate activity not listed elsewhere||14|
|Estate agency or property management services||12||Repairing personal or household goods||10|
|Farming or agriculture not listed elsewhere||6.5||Repairing vehicles||8.5|
|Film, radio, television or video production||13||Retailing food, confectionery, tobacco, newspapers or children’s clothing||4|
|Financial services||13.5||Retailing pharmaceuticals, medical goods, cosmetics or toiletries||8|
|Forestry or fishing||10.5||Retailing not listed elsewhere||7.5|
|General building or construction services*||9.5||Retailing vehicles or fuel||6.5|
|Hairdressing or other beauty treatment services||13||Secretarial services||13|
|Hiring or renting goods||9.5||Social work||11|
|Hotel or accommodation||10.5||Sport or recreation||8.5|
|Investigation or security||12||Transport or storage, including couriers, freight, removals and taxis||10|
|Labour-only building or construction services*||14.5||Travel agency||10.5|
|Laundry or dry-cleaning services||12||Veterinary medicine||11|
|Lawyer or legal services||14.5||Wholesaling agricultural products||8|
|Library, archive, museum or other cultural activity||9.5||Wholesaling food||7.5|
|Management consultancy||14||Wholesaling not listed elsewhere||8.5|
|Manufacturing fabricated metal products||10.5|