Instead of working out the difference between input tax and output tax in the quarter and paying over or reclaiming the difference as appropriate, businesses that operate the fixed rate scheme instead apply a single percentage to turnover during the quarter and pay that figure to HMRC.
The percentage depends on the nature of the business and different rates apply to different business sectors. HMRC publish tables of the rates for the purposes of the scheme on their website
Using the scheme can save a lot of work. However, where customers are VAT-rated, a business will still need to calculate VAT and issue VAT invoices in the normal way to allow the customer to reclaim the associated VAT.
The flat rate scheme for small businesses is only available to businesses with a turnover of less than £150,000 (excluding VAT). However, once a business is in the scheme, it can remain in the scheme even if turnover rises above £150,000, as long as it does not exceed £230,000.
When there is a change in the standard rate of VAT the flat rates that apply under the scheme are also revised. The standard rate of VAT increased from 17.5% to 20% from 4 January 2011. The flat rate percentages applying from 1 January 2010 to 3 January 2011 and those applying from 4 January 2011 are available on the HMRC website.
Where a VAT quarter straddles 4 January 2011, it is necessary to split the quarter into the period up to and including 3 January 2011 and that from 4 January 2011 in order to correctly work out the VAT for the quarter. The position is illustrated by the following example.
Fix IT is a small business that provides computer repairs. Its annual turnover is around £50,000 and it is registered for the VAT scheme for small business. Under the scheme, it applies the percentage relevant to computer repair services.
Its VAT quarters end on 31 January, 30 April, 31 July and 31 October.
Its VAT return for the quarter to 31 January 2011 spans the increase in the basic rate of tax on 4 January 2011. The relevant percentage applying on and before 3 January 2011 is 9.5% and the relevant percentage applying from 4 January 2011 is 10.5%.
Fix IT has a turnover of £11,000 during the quarter, of which £8,500 relates to the period prior to 4 January 2011, and £2,500 relates to the period from 4 to 31 January 2011.
The VAT payable for the quarter is as follows:
VAT flat rate percentage
1 November 2010 to 3 January 2011
4 January 2011 to 31 January 2011
VAT due for the quarter is therefore £1,070.