If you run a small VAT-registered business, the method you use to calculate VAT can have a significant impact on both your cash flow and the time spent maintaining records.

For some companies, the standard method of calculating VAT is the most suitable, but depending on your circumstances, the VAT Flat Rate Scheme may be worth exploring.

Comparing the methods

Under the standard method, you charge VAT on your sales and reclaim VAT on your purchases, paying the difference to HM Revenue & Customs (HMRC).

The Flat Rate Scheme works differently. You continue to charge customers the normal VAT rate, but instead of reclaiming VAT on most purchases, you pay a fixed percentage of your VAT-inclusive turnover to HMRC. The exact percentage depends on the industry your business operates in.

To be eligible, businesses must have a VAT turnover of £150,000 or less (excluding VAT).

When the Flat Rate Scheme may be advantageous

The scheme is particularly useful for businesses with low VAT-able expenses. For instance, a consultant or designer whose main offering is their time may find that the flat rate percentage is more favourable than reclaiming VAT under the standard method.

Some business owners also appreciate the simplicity. Since VAT is not reclaimed on most purchases—apart from certain capital assets over £2,000—the calculations tend to be quicker and less time-consuming.

When the standard method could be preferable

If your business frequently purchases goods or services that include VAT, reclaiming VAT through the standard method is often more cost-effective, especially for larger or recurring purchases.

Choosing the right method

The most reliable way to determine which method suits your business is to compare the numbers and assess the impact on cash flow.

If you would like guidance on whether the VAT Flat Rate Scheme is suitable for your business, please get in touch. We are always happy to help!