The flat rate VAT scheme was introduced by the government to help small businesses simplify the process of completing their quarterly VAT returns. You still charge your customers VAT at 17.5%, but pay over a smaller % to HMRC. Completing your VAT return is a much simpler process as you just have to add up your quarterly gross sales and multiply them by the appropriate percentage to calculate the total VAT liability.
It’s actually possible to make a profit from using the flat rate scheme if your business purchases are low. This is commonly the case for contractors, and professional service businesses who are mainly selling their time rather than physical goods.
For example, an advertising agency has sales of £20,000 in the quarter and charges VAT at 17.5% to its clients (£3,500). It has VATable purchases of £5,000, on which it paid VAT of £875. The appropriate flat rate scheme percentage is 10%.
Under the standard VAT scheme, it would pay a total of £2,625 to HMRC (£3,500-£875).
But by using the Flat Rate scheme, it would pay VAT to HMRC of 10% * £23,500 = £2,350. This effectively creates a profit for the business of £275 (£2,625 – £2,350).
Newly VAT registered businesses receive an additional 1% discount off of their particular flat rate percentage.
More details of the flat rate scheme can be found here.
As always, ask your accountant to help you work out if the Flat Rate Scheme is the right way to pay your VAT.