The Flat Rate Scheme and UK ecommerce VAT rules

For many sellers, the UK Flat Rate Scheme has been helpful in managing their cash flow and simplifying their records. This scheme allows them to apply a fixed VAT rate. However, with new UK ecommerce rules for UK sellers, businesses should consider whether to remain on the scheme or not. Has Brexit changed anything to the Flat Rate Scheme for your business? Are you still benefitting from the scheme or losing out?  

An overview of the Flat Rate Scheme 

The Flat Rate Scheme is a mechanism available in the UK for all businesses with a VAT turnover that does not exceed GBP150,000 (excluding VAT).  

Through this, businesses pay a fixed rate of VAT to the UK tax authorities (HMRC) and keep the difference between the VAT amount collected and the amount paid to HMRC.

The flip side of this simplification is that you cannot reclaim any VAT on purchases except for capital assets valued over GBP 2,000.  

Changes in the UK and the Flat Rate Scheme Calculation 

Brexit has not impacted the Flat Rate Scheme as such in the UK. Although, the VAT amounts to be included in the calculation of online sellers is likely to be affected with the introduction of the new ecommerce VAT rules as of 1^st January 2021.  

Under these new rules, online marketplaces (e.g. Amazon, eBay, Etsy, etc.) have become accountable to report VAT on certain supplies to GB consumers. In such cases, the responsibility to charge and remit VAT shifts from the seller to the marketplace. This means that, where the marketplace becomes responsible for accounting for the VAT, sellers should no longer include these sales in their Flat Rate Scheme calculation.

What changes for businesses selling on a marketplace in the UK 

If a trader fulfils goods to customers from the UK through a marketplace, the Flat Rate Scheme may no longer be a beneficial commercial option. As marketplaces will now be taking on the responsibility for the VAT for this type of supply, the business would be making a VAT exempt supply to the marketplace and under the normal scheme would pay no VAT.  

However, zero-rated supplies should be included in a business’ calculation of the Flat Rate Scheme. The risk here is to end up with a VAT liability higher than on the standard VAT accounting procedure. Additionally, if as a business you have a high level of purchases, leaving the scheme means that you could start reclaiming the VAT incurred on these expenses.  

Selling goods to GB consumers on your own website 

The new rules do not affect any sales of goods already located in GB and delivered to GB consumers when the sale is facilitated on a business-owned website. If you are selling on your own website, you should not see any changes to your Flat Rate Scheme calculation. If the scheme works for your business, why not stick with it?  

The UK offers significant opportunities for online sellers. With Brexit and new VAT legislation, businesses have had to be more resilient and adaptable than ever. Added VAT complexity does not help with existing Brexit complications. As a seller, make time to review your options and make commercial decisions that make sense for your business.

Need to know more?

For businesses looking to discuss their specific situation or learn more on this topic, we offer a Consultancy service that will ensure you get the tailor-made VAT advice you need. Contact us today to learn more.

This information was accurate at the time of publishing: 26/01/2021