Does the business want to register for the Flat Rate Scheme?
Businesses on the Flat Rate Scheme:
- pay a fixed rate of VAT to HMRC, based on their business type (usually 7.5% for ecommerce businesses)
- keep the difference between what they charge customers and pay to HMRC
can’t reclaim VAT on their purchases (except for certain capital assets over £2,000)
- Can take an extra 1% off their fixed rate in the first year of VAT registration.
- Must move to the standard scheme if their revenue is over £230k (and cannot join if expected revenue is > £150k).
Show me an example
A Shopify business on the Flat rate Scheme does £20,000 worth of sales in a quarter. It charges 20% VAT and its sales, including £4,000 for VAT, total £24,000.
This type of business pays a VAT flat rate of 7.5% of total sales, which is £1,800. This is less than the £4,000 it charged for VAT and it can keep the £2,200 difference.
If the VAT costs this business would have been able to reclaim in the period are less than the £2,200, this business would be better off on the Flat Rate scheme.
Before you decide
You will need to have an idea how much the business will:
- spend on goods to run the company over the next 3 months
- earn in sales, including VAT, over the next 3 months
If you cannot decide right now, answer ‘no’. The business can register for the Flat Rate Scheme at a later date. Read more about it here:
https://www.gov.uk/vat-flat-rate-scheme (opens in a new tab).