Flat Rate VAT Scheme

(4 minutes to read)

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.

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%.

For example:

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

Q&A on the Flat Rate VAT Scheme

Our head of Tax and Accounting James Trowell has answered some of the questions he is most frequently asked regarding the Flat Rate VAT scheme.

Can I still benefit from the 1% discount in year one?

Yes you can still benefit from the 1% discount from the point of VAT Registration.

How often does Dolan Accountancy retest my status as a cost trader?

We will check this each VAT quarter once you have sent through confirmation that FreeAgent is up to date for review.

How does Dolan Accountancy test my status?

We  will test your status for the quarter, if your VAT-inclusive goods purchases come out as less than 2% of your VAT-inclusive turnover, or if the VAT-inclusive goods purchases are more than 2% of VAT-inclusive turnover but less than £250, you’ll be a limited cost trader for that quarter.

If I was to purchase a new laptop for over £2,000 can I still claim back VAT?

You can reclaim the VAT charged on Capital expenditure goods where the amount of the purchase, including VAT, is £2,000 or more. However if the supply is:

  • more than one purchase
  • under £2,000 including VAT, or of services

If I subcontract out work, does this count as capital good?

Unfortunately, if you subcontract work out this is not classified as a capital good. If you are subcontracting then you may need to review and see if the flat rate scheme is best for you, as if you were on the standard scheme you will be able to reclaim the VAT on the subcontractor cost.

To find out more about the Flat Rate VAT Scheme or contracting please call Jaime on 01442 795100 or email jaime.thorpe@dolanaccountancy.com.

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Why Dolan Accountancy?

Dolan Accountancy was set up by Simon J Dolan, the man behind the well-known brand SJD Accountancy. With over 25 years experience in the contracting marketing, Dolan Accountancy has the heritage, reputation and credibility you can trust. Working closely with our sister company, Contractor Umbrella, it means we can offer one low cost, fixed fee package at £105 + VAT per month. This gives you the flexibility of using both our Limited Company Accountancy Services and our award winning Umbrella Service, for one inclusive cost. We don’t believe in tiered packages or hidden extra fees, instead we aim to give you everything you need, including:

  • Free Company Formation – This is where it all begins. Once you have decided on an available name, we will form your company free of charge (if using our accountancy services) and it will be ready for you to use in as little as three hours.
  • Free use of Contractor Umbrella – With changes in Public Sector IR35 Legislation we understand that sometimes you are required to contract via an umbrella company. We will keep your limited company ticking over, while you work margin free via our sister company, Contractor Umbrella.
  • A Dedicated Accountant – Your accountant will be there for any company or personal tax advice that you require. We will never outsource work, even to internal teams.
  • Free Access to FreeAgent – The founder behind the multi award winning FreeAgent platform was one of Simon’s first clients, therefore it only seems fitting that we offer all of our clients access to FreeAgent, free of charge.
  • Free Business Banking – We have decided to waive our commission so our clients can use Tide free of charge for the first year.
  • Unlimited IR35 Status Reviews – We will review all of your contracts for IR35 purposes and provide you with our professional opinion as to its status.
  • Free Registered and Director’s Service Office Address – Sometimes you just don’t want your home address on display at Companies House. When you sign up to our accountancy services, we will offer the use of our address as an alternative.
  • Your Business and Personal Taxation Needs – This includes Company Accounts, Director’s Personal Tax Return, VAT Returns, Payroll, Corporation Tax and Dividend advice, to name just a few.
  • Same day payments- We offer same day payments as standard providing funds are received into our account by 9am, for no additional fee.

If you’d like to find out more about how Dolan Accountancy can help you and your business, please give us a call on 01442 795100 or email sophie.lewis@dolanaccountancy.com or jaime.thorpe@dolanaccountancy.com.