Changes to the VAT Flat Rate Scheme – What Does it Mean for You?

19/02/2022 - 6 minutes read

VAT Flat rate scheme changes have been confirmed by HMRC and they will be effective from 1 June 2022.

Changes to the VAT Flat Rate Scheme - What Does it Mean for You?

Changes to the VAT Flat Rate Scheme – What Does it Mean for You?

Postponed VAT accounting was introduced on 1 January 2021 and allows UK VAT registered businesses to declare and recover import VAT on the same return, rather than having to pay it up front when the goods are imported and recover it later.

Full customs control were introduced on 1 January 2022.

Businesses registered under the Flat Rate Scheme were asked to include imports accounted for using postponed VAT accounting in the turnover that is subject to the flat rate percentage.

What is the VAT Flat Rate Scheme?

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.

With the Flat Rate Scheme:

  • – you pay a fixed rate of VAT to HMRC
  • – 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

The scheme is for businesses with a turnover of no more than £150,000 a year, excluding VAT. There are some additional rules to stop the abuse of the scheme.

Businesses will cease to be eligible to use the scheme if the total value of their income for the year ending is more than £230,000. However, if HMRC is satisfied that the total value of income in the next 12 months will not exceed £191,500, companies may be eligible to remain in the scheme.

If a company is part of a VAT group, or are eligible to join an existing VAT group, then it cannot use the flat rate scheme.

Work out your flat rate

The VAT flat rate you use usually depends on your business type. You may pay a different rate if you only spend a small amount on goods.

You get a 1% discount if you’re in your first year as a VAT-registered business.

If you spend a small amount on goods

You’re classed as a ‘limited cost business’ if your goods cost less than either:

  • – 2% of your turnover
  • – £1,000 a year (if your costs are more than 2%)

This means you pay a higher rate of 16.5%. You can calculate if you need to pay the higher rate and work out which goods count as costs.

If you are not a limited cost business, you use your business type to work out your flat rate, see a list of flat rates for types of business here.

Next steps – VAT Flat Rate Scheme changes 

HMRC guidance has now been updated to reflect the new treatment as per the VAT Flat Rate Scheme changes for import VAT for Flat Rate Scheme traders using postponed VAT accounting. Businesses must adopt the new guidance for VAT Return periods that start on or after 1 June 2022.

As per the VAT Flat Rate Scheme changes, the correct treatment under the legislation excludes the value of imported goods from the Flat Rate Scheme calculation.

The full amount of import VAT should be added to box 1 following the flat rate calculation.

Any amounts that may have been due to HMRC if the correct treatment had been in place for periods starting before 1 June 2022 will not be collected and businesses will not be penalised in relation to those amounts. In these circumstances, businesses do not need to amend previously declared returns.

If any businesses have overpaid HMRC while they have been adopting the incorrect treatment before the VAT Flat Rate Scheme changes were announced, businesses should look to recover these amounts using the standard process to correct errors on your VAT Returns.

It was included in box 1 on the VAT Return, VAT due in the period on sales and other outputs, leading to an incorrect assumption that it would constitute a supply for Flat Rate Scheme purposes and the flat rate percentage should be applied.

Flat Rate Scheme Guidance

More information on the Flat Rate Scheme can be found in VAT Notice 733: Flat Rate Scheme for small businesses.

Find more information on completing your VAT Return to account for import VAT if you are using a VAT accounting scheme.

You can also find more information about working out the VAT due on sales in VAT Notice 700/12.

How can MCL Accountants help?

Contact MCL Accountants on 01702 593 029 if you want to know more about VAT Flat rate scheme changes or if you need any assistance with the preparation and submission of your business accounts or self-assessment tax returns to HMRC.