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If you are a small business it can be advantageous to join the VAT flat rate scheme for small businesses.

Under the scheme you use a flat rate percentage to work out the amount of VAT you need to pay over to HMRC. You do not need to record VAT on sales and purchases separately and claim the difference. This can save a lot of work.

The flat rate percentage depends on your business sector. The percentages are listed on the GOV.UK website (see the guidance at www.gov.uk/vat-flat-rate-scheme/overview). The input tax payable to HMRC is worked out by multiplying the flat rate percentage for the relevant business sector by turnover for the quarter inclusive of VAT.

You can join the scheme as long as your turnover excluding VAT is not more than £150,000 a year. You can stay in the scheme until your turnover reaches £230,000 a year.

More details on the scheme can be found in HMRC Notice 733.

Example:
Gill runs a computer repair business. Her annual turnover excluding VAT is £100,000. She registers for the VAT flat rate scheme.

In a particular VAT quarter, her turnover, including VAT, is £31,200. The flat rate percentage for her sector is 10.5%.

She must pay VAT of £3,276 (10.5% x £31,200) over to HMRC.