Getting the right fit for flat rate VAT
Using the flat rate VAT scheme can save some small businesses a lot of hassle and money, but it doesn’t suit everyone. The benefit largely depends on the trade category your business falls into, as each trade has its own flat rate.
The flat rate percentage is multiplied by your gross sales to calculate the amount of VAT to pay to HMRC each quarter. So the higher the flat rate, the larger amount you need to pay over. Under the flat rate scheme, you ignore all the VAT on purchases, unless you buy an asset costing over £2,000.
The tricky bit is matching your business activities to one of the 55 trade categories. If you choose the wrong category, HMRC will let you change it, but generally not with retrospective effect. This means you could be saddled with too high a flat rate for a while. If you genuinely make a mistake about the trade category on the application form for the flat rate scheme, you can change it, but you must tell HMRC as soon as possible.
Some trade categories cover a wide range of activities, while other activities don't seem to fit anywhere. If your business doesn't fit anywhere obvious, you need to choose one of the catch-all categories such as 'any other activity not listed elsewhere' or 'business services not listed elsewhere'.
HMRC may decide a different trade category is a better fit for your business, particularly if their choice would mean more VAT is due. If this happens you can challenge HMRC's decision. We can help you with that – after all, you know your business better than HMRC.