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VAT schemes ( standard rate/ flat rate)


How does the Standard Rate VAT scheme work?

The Standard rate scheme is the normal method of calculating how much VAT you owe HMRC. With this method you deduct all the VAT you have paid on expenses from the VAT you have charged on your invoices. The difference is the amount you have to pay HMRC in VAT.

How does the Flat Rate VAT scheme work?

On the flat rate scheme the amount of VAT you owe to HMRC is calculated from your sales only.

You pay over a flat (hence the name!) percentage of your sales. You still charge 20% on your sales but the percentage you pay to HMRC varies depending on which sector your business operates in. For example, the IT sector pays 14.5% of their gross sales. (See below for a full list of sectors and their percentages).

The difference between what you charge on your gross sales and what you pay to HMRC is kept in the company as additional income. The only downside is that this additional income is classed as profit and so is taxable at 20%.

An added bonus of the Flat rate scheme is that there is a 1% discount if you are in your first year of VAT registration.

Businesses with a turnover in excess of £150,000 cannot make use of the Flat rate scheme, and must use the standard rate scheme.

Flat Rate scheme and VAT on expenses

Although you cannot claim VAT back on individual expenses whilst on the Flat rate scheme, you can

  • (1st VAT return only) Claim VAT back on any assets you have on hand already at the point of registering for VAT even when Flat rate. 
  • Claim VAT back on any asset which has an individual cost above £2,000.


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