Should the self-employed leave the VAT Flat Rate Scheme?

The VAT Flat Rate Scheme is a simplified scheme for smaller businesses, but it may not be the best option for all self-employed people.

Under the flat rate scheme, businesses pay a fixed percentage of their VAT-inclusive turnover to HMRC instead of the difference between the VAT they charge and the VAT they incur. The flat rate percentage depends on the business sector within which the trader operates.

The following table shows the HMRC set percentages for VAT under the flat rate scheme:

When should self-employed people leave the flat rate scheme?

There are a few reasons why self-employed people may want to consider leaving the flat rate scheme:

• If their turnover is high. The flat rate percentage for limited cost businesses is 16.5% of VAT-inclusive turnover. This equates to 19.8% of VAT-exclusive turnover, which means that virtually all the VAT charged to customers is paid over to HMRC, with very little allowance to cover input VAT. If a business has a high turnover, it may be better off using traditional VAT accounting and opting to leave the flat rate scheme voluntarily.

• If they have significant expenditure on non-relevant goods. The list of relevant goods excludes all service and fuel. Consequently, a business that has significant expenditure on non-relevant goods, may not recover the associated input VAT in full. In this situation, the trader may be better off using traditional VAT accounting and opting to leave the flat rate scheme voluntarily.

Conclusion

If you are self-employed and you are considering leaving the VAT Flat Rate Scheme, you should speak to an accountant or tax advisor to get advice on the best course of action for your specific circumstances.