VAT for Limited Companies: Registration and the Flat Rate Scheme

You must register once VAT-able turnover for the last 12 months exceeds £90,000, or you expect to pass it in the next 30 days. Below that, registering voluntarily lets you reclaim VAT on your costs. It usually pays if your customers are VAT-registered businesses, because they can reclaim the VAT you charge. Example: a software consultancy turning over £45,000 a year registers voluntarily and reclaims £2,800 of VAT on equipment and subscriptions in year one. If you sell mainly to the public, staying unregistered may keep your prices competitive. Once registered, you must keep digital records and file under Making Tax Digital.

If your taxable turnover is £150,000 or less (excluding VAT), you can join the flat rate scheme. You pay HMRC a fixed percentage of your VAT-inclusive turnover, set by your trade sector, instead of tracking VAT on every purchase. You get a 1% discount in your first year of VAT registration. You can stay in the scheme until total income including VAT passes £230,000. You still issue VAT invoices showing VAT separately.

If you spend less than 2% of VAT-inclusive turnover on "relevant goods", or more than 2% but under £1,000 a year, you are a limited cost trader and must use a flat rate of 16.5%. That equals 19.8% of your net turnover, so almost all the VAT you charge goes to HMRC. Relevant goods exclude services, capital items such as laptops, fuel (unless you are in transport), food for staff, and downloaded software. Example: a consultant billing £12,000 a quarter including VAT would pay £1,980 under the 16.5% rate. Under normal VAT accounting, with £400 of VAT on costs, they would pay £1,600. Many service companies are better off leaving the scheme.