Again, to assess whether the scheme is worthwhile, there is no substitute for doing the sums. This may be problematic for a business that spends little on goods but incurs VAT on services and items such as fuel and promotional items, which are excluded from the calculation.

The flat rate percentage for limited cost businesses of 16.5% of VAT-inclusive turnover is equivalent to 19.8% of net turnover, leaving little margin for input VAT recovery as 99% of the VAT charged at 20% must be paid over to HMRC. There is no substitute to doing the sums. The scheme will save work, but this may come at a cost if the amount that you would pay using the normal rules is less than the amount determined using the fixed rate percentage. Limited cost businesses must use a higher rate of 16.5% to work out the VAT that they pay over to HMRC, regardless of the sector in which they operate. These are business where goods are less than either 2% of turnover or £1,000 a year. Special rules apply to business that do not buy many goods – known as limited cost businesses. She does not need to keep records of her input VAT or work out the difference between VAT charged and VAT suffered in the quarter. Consequently, she must pay HMRC VAT of £4,212 for the quarter. The flat rate percentage for her sector – hairdressing and other beauty treatments – is 13%. In a particular VAT quarter, her VAT inclusive turnover is £32,400. Her annual turnover (excluding VAT) is £90,000.

The VAT that your need to pay to HMRC for a quarter is simply the fixed rate percentage as applied to your VAT-inclusive turnover. You receive a discount of 1% from your flat-rate percentage for the first year that you are in the scheme. The percentages allow for input VAT recovery and are less than the rate of VAT charged. The percentages applying to different business sectors can be found on the Gov.uk website. The flat rate percentage depends on the nature of your business. Once in the scheme, you must leave if your turnover in the last 12 months was more than £230,000 including VAT, or you expect your turnover in the next 30 days alone to be more than £230,000 (including VAT). You cannot re-join the scheme if you have left it in the last 12 months. This is the total of everything that you sell that is not exempt from VAT, exclusive of VAT. To be eligible to join the VAT flat rate scheme you must be a VAT-registered business and expect your VAT taxable turnover to be £150,000 or less. The percentage depends on the nature of your business. Instead of working out the VAT that you need to pay over to HMRC by deducting input VAT from output VAT, you pay a fixed percentage of your VAT-inclusive turnover. The VAT is a simplified scheme that can save work.

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