The scheme can be helpful for businesses with turnover under £150,000 as it’s simple to use. You can even make money out of the scheme if the flat rate percentage applicable to your trade sector is particularly favourable.
For example, a journalist pays 12.5% of gross sales as VAT each quarter and doesn’t have to report the costs of business purchases on the VAT return. There is an exception when buying assets costing £2,000 or more.
You need to pick the right trade sector for your business. Use normal English to describe what your business does and compare this to the HMRC guidance. We can help you with that. Anomalies can create difficulties: software is grouped with computer and IT consultancy (flat rate 14.5%), but publishing (flat rate 11%) covers books, journals, newspapers and sound recordings. So a business that publishes information online as well as software will have products that fall under ‘publishing’ as well as in the ‘computer and IT consultancy’ sector.
The business owner must judge which products generate the majority of their sales and use the flat rate for the corresponding sector.
Once you are in the flat rate scheme, review your choice of trade sector on the anniversary of the date on which you started to use it. Estimate which products will make up the greatest percentage of sales in the following year. Your new flat rate (if it changes) should be used from the beginning of that year.
If your business drops one type of activity completely, this may lead to a change in trade sector. In that case use the new flat rate percentage from the date the business activities changed until the next anniversary of joining the flat rate scheme. Tell HMRC in writing within 30 days if you change the flat rate you use, the date it changed, and why.