The amount of VAT a business pays or claims back from HM Revenue and Customs (HMRC) is usually the difference between the VAT charged by the business to customers and the VAT the business pays on their own purchases.

How it works

  • you pay a fixed rate of VAT to HMRC (depending on your business type)

  • you keep the difference between what you charge your customers and pay to HMRC

  • you cannot reclaim the VAT on your purchases - except for certain capital assets over £2,000

To join the scheme your VAT turnover must be £150,000 or less (excluding VAT), and you must apply to HMRC.

When you register for the Flat Rate scheme for the first time, HMRC allows you to apply a 1% discount in the first year.

Limited Cost Trader

If you are considered what is known as being a limited cost trader, then you would be subject to a flat rate sector of 16.5% (if it’s your first year of VAT registration then you would still receive the 1% discount bringing the percentage down to 15.5%). This isn’t too dissimilar to just being on the standard VAT scheme, but without the added benefit of being able to reclaim any VAT on your expenses.

For example:

£1,000 net sale (charge for service)

£200 charge for VAT

£1,200 gross sale

Flat rate = 16.5%

VAT payable to HMRC = £1,200 x 16.5% = £198

The difference between VAT collected and paid here is only £2.

A limited cost trader is defined as one whose VAT inclusive expenditure on goods in the VAT accounting period are less than the higher of the following criteria:

● 2% of relevant VAT inclusive turnover for the quarter

● Greater than 2% of their VAT inclusive turnover but less than £1,000 per annum (so less than £250 per quarter)

Goods, for the purposes of this measure, must be used exclusively for the purpose of the business but exclude the following items:

● Capital expenditure

● Food or drink for consumption by the flat rate business or its employees

● Vehicles, vehicle parts and fuel

To decide if this affects you then you need to consider what expenditure you have in the way of tangible goods used within the business (including stationery, printed materials, hardware, computer consumables) and your direct costs of sales (excluding delivery/transport, subcontractors, web hosting).

The current rates applicable to businesses are below:

Type of business

2021/2022 & 2020/21 Flat rate (%)

Accountancy or bookkeeping

14.5

Advertising

11

Agricultural services

11

Any other activity not listed elsewhere

12

Architect, civil and structural engineer or surveyor

14.5

Boarding or care of animals

12

Business services not listed elsewhere

12

Catering services including restaurants and takeaways before 15th July 2020

12.5

Catering services including restaurants and takeaways from 15th July 2020 to 30th September 2021

4.5

Catering services including restaurants and takeaways from 1st October 2021 to 31st March 2022

8.5

Computer and IT consultancy or data processing

14.5

Computer repair services

10.5

Entertainment or journalism

12.5

Estate agency or property management services

12

Farming or agriculture not listed elsewhere

6.5

Film, radio, television or video production

13

Financial services

13.5

Forestry or fishing

10.5

General building or construction services*

9.5

Hairdressing or other beauty treatment services

13

Hiring or renting goods

9.5

Hotel or accommodation before 15th July 2020

10.5

Hotel or accommodation from 15th July 2020 to 30th September 2021

0

Hotel or accommodation from 1st October 2021 to 31st March 2022

5.5

Investigation or security

12

Labour-only building or construction services*

14.5

Laundry or dry-cleaning services

12

Lawyers or legal services

14.5

Library, archive, museum or other cultural activity

9.5

Limited cost trader

16.5

Management consultancy

14

Manufacturing fabricated metal products

10.5

Manufacturing food

9

Manufacturing not listed elsewhere

9.5

Manufacturing yarn, textiles or clothing

9

Membership organisation

8

Mining or quarrying

10

Packaging

9

Photography

11

Post offices

5

Printing

8.5

Publishing

11

Pubs before 15th July 2020

6.5

Pubs from 15th July 2020 to 30th September 2021

1

Pubs from 1st October 2021 to 31st March 2022

4

Real estate activity not listed elsewhere

14

Repairing personal or household goods

10

Repairing vehicles

8.5

Retailing food, confectionery, tobacco, newspapers or children’s clothing

4

Retailing pharmaceuticals, medical goods, cosmetics or toiletries

8

Retailing not listed elsewhere

7.5

Retailing vehicles or fuel

6.5

Secretarial services

13

Social work

11

Sport or recreation

8.5

Transport or storage, including couriers, freight, removals, and taxis

10

Travel agency

10.5

Veterinary medicine

11

Wholesaling agricultural products

8

Wholesaling food

7.5

Wholesaling not listed elsewhere

8.5

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