How do I calculate flat rate VAT?

The amount of VAT to pay HMRC when using the flat rate scheme is calculated by taking your gross sales (the amount including VAT) and multiplying it by your flat rate percentage.

Cash or invoice accounting

There are two methods of calculating VAT, one based on invoices raised during the VAT period and another based on the cash received in the period. For simplicity we’ll call them ‘invoice accounting’ and ‘cash accounting’ respectively. Depending on the method your company uses for Flat Rate VAT, the calculations are slightly different.

The basis of the calculation of your VAT returns is, if your company uses invoice accounting then you sum the gross value of all the invoices raised during the VAT period and multiply the total by your flat rate percentage. If using the cash accounting method then you sum the income (cash) received during the period and multiply it by your flat rate percentage.

Case study

Indigo Advisors Ltd is an IT consultancy business that made sales of £10,000 + VAT during its VAT quarter. It charged its clients 20% VAT on its sales of £10,000 which is £2,000 of VAT. Its gross sales for the period were therefore £10,000 + £2,000 = £12,000.

Indigo Advisors Ltd is an IT consultancy with a flat rate percentage 14.5% and it uses cash accounting. Based on its gross sales of £12,000 the VAT due to HMRC would therefore be £12,000 x 14.5% = £1,740.

This means that Indigo Advisors Ltd has charged its clients £2,000 VAT but pays HMRC £1,740. The difference of £260 is retained by Indigo Advisors Ltd to cover the VAT it has paid on its purchases and expenses during the VAT period.

First year discount

During your first year of being VAT registered, HMRC give a 1% discount on your flat rate percentage to cover additional startup costs. If for example your flat rate percentage is normally 14.5%, the flat rate percentage for your first year of VAT registration would be 13.5%.

Claiming back VAT

On your day to day expenses and purchases you will not claim back VAT – this is covered by the difference between the 20% VAT you charge your clients and the VAT you pay HMRC based on your flat rate percentage. This is why if you incur a large amount of expenses the flat rate scheme may not be ideal for you.

You can however in some circumstances claim back VAT on capital purchases over £2,000.

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