The Flat Rate Scheme is open to businesses with a turnover of less than £ 150 000, and it’s designed to simplify the VAT process – particularly for freelancers, contractors and small businesses. You have to make sure you apply to HMRC to sign up for it.

So, as you already know, the amount of VAT your pay HMRC each quarter reflects the difference between the VAT you’ve charged customers, and the VAT you can reclaim on your supplier bills. But things are different with the Flat Rate Scheme.

With the Flat Rate Scheme, the two-stage process mentioned above is simplified into one. You still charge VAT to your customers in the usual way, but instead you pay a percentage of your total sales to HMRC as VAT– and that percentage depends on what kind of business you run. Here are some things about the Flat Rate Scheme that you should know:

• You pay a fixed rate of VAT to HMRC;
• You keep the different between what you charge your customers and pay to HMRC;
• You can’t reclaim the VAT on your purchases – except for certain capital assets over £2,000 (for example, a computer package or items of kitchen equipment bought for a restaurant);
• HMRC allows new registrants to apply a 1% discount to their rate for their first year.

When you sign up for the FlatRate Scheme, you will apply aHMRC-mandated rate to yourturnover, and it’ll be based onyour sector.