VAT: changes to the flat rate scheme
To reflect the change to the standard rate of VAT, the VAT inclusive percentage
rates for different categories of business and exit thresholds applicable to the
flat rate scheme will increase.
The flat rate scheme was introduced in 2002 for businesses with a turnover of up to £150,000. That limit remains unchanged. Businesses are required to leave the scheme if either:
(a) its tax inclusive annual flat rate turnover exceeds £225,000; or
(b) on a forward look, its tax inclusive turnover in the next 30 days can reasonably be expected to exceed £225,000.
As a result of the increase in the standard rate of VAT both of these exit thresholds will increase to £230,000. However, if a business using the flat rate scheme exceeds the annual exit threshold as a result of a one off transaction but, in a subsequent year, expects its tax inclusive annual flat rate turnover to be less than £187,500, it may remain in the scheme with the agreement of HMRC. As a consequence of the increase in the standard rate of VAT to 20% this threshold will increase to £191,500 to maintain the same effect.
Who will be affected?
The changes to the flat rate scheme will affect small businesses that currently use, or are considering using the VAT flat rate scheme.
The changes to the flat rate scheme will have effect on and after 4 January 2011.
The changes to the flat rate scheme are designed to reflect the increase in the standard rate of VAT and should, therefore, remain an option for small businesses that choose to use the scheme.