VAT flat rate scheme

A pub that served meals ran into difficulty with the VAT flat rate scheme, a VAT tribunal heard. The flat rate scheme simplifies VAT calculations for very small businesses by allowing them to pay VAT as a percentage of turnover.

The rate depends on what type of business category you fall into. Where a business straddles two categories, it must use the percentage that applies to the type of business that is expected to form most of the turnover. You are not allowed to apportion turnover between categories.

For example, if a pub expects drink sales to exceed food sales, it has to pay VAT at the rate of 5.5%, but if it is the other way round and the food sales are more than sales of drink, the applicable VAT percentage is 12%. In the tribunal case, the owners of the pub in question thought that their customers would buy more drinks and less food. But in the event, food sales turned out to be marginally higher than drink sales. And the tribunal agreed with HM Revenue & Customs that the pub should have paid VAT at 12% on all its turnover.

If you are a trader who uses the flat rate scheme, you should regularly check that you are using the correct VAT rate. The nature of your business may change over time and it could move into a new category.

Although the flat rate scheme simplifies VAT calculations for traders, it can sometimes result in higher VAT payments, for example where traders have a relatively high level of zero-rated sales to overseas customers.

If your turnover is £150,000 or less, we can help you decide whether you would benefit from using the flat rate scheme and into which category your business falls.