Changing from Flat Vat Rate to Standard

Are you currently registered for a flat VAT rate and are looking to change your VAT scheme to one that best suits your business or your plans for growth? This isn’t uncommon. Often, business owners realise that the VAT scheme they initially signed up for isn’t going to work as their business expands or as they downscale, or perhaps they are no longer eligible based on HMRC’s criteria. Either way, moving VAT scheme isn’t that rare.

One of the most common changes is from the VAT flat rate because the business no longer fits the requirements. You must understand when you no longer qualify for a flat VAT rate and how to change VAT scheme without the risk of penalties.

The VAT flat rate percentages vary dependent on your sector or industry. You can find a complete list of all the flat rates for different types of business here, but for example, Accountancy is 14.5%, Advertising is 11%, and Catering Services is 12.5%.

Note: You will get a 1% discount in your first year operating as a VAT-registered company.

It’s also worth considering what you need to do if you’re an EU business operating in the UK. You don’t have to register for VAT if you only sell goods outside of the UK at the point of sale to UK VAT-registered businesses. However, UK businesses cannot use the VAT MOSS system in the UK and will need to adapt how they pay VAT to the EU based on each individual country’s requirements.

Step 1: Assess the Need for Change

If you’re a small business currently on the flat VAT rate, you will have to constantly check your finances and VAT turnover to ensure your business remains eligible. You will have to move from a flat VAT rate to a standard VAT rate if: 

• Your turnover was more than £230,000 over the past year, including your VAT.
• Your turnover for the next month is expected to exceed the same amount, also inclusive of VAT.
• Your business shifts scheme – if you become a tour operator, you will need to use the Tour Operator’s Margin Scheme, or if you plan on purchasing capital goods, these will be covered by the Capital Goods Scheme.
• If the amount of money you spend on goods and services is less than 2% of your VAT turnover or more than 2% but less than £1,000 a year.
• You have committed a VAT offence over the past year, such as not paying your VAT.

You can also opt to leave your existing VAT scheme if it is unsuitable for your business needs. Just remember that this is not a decision to be taken lightly as you will have to adhere to any new scheme you join for a minimum period of a year.

Note: If you want help working out your VAT flat rate use the HMRC tool here.

Step 2: Familiarize Yourself with Standard VAT Rates

The standard VAT rate is 20%, although there are three different types of VAT rates so you will need to check to ensure that the VAT scheme you choose is the right one for your business. HMRC has set the standard rate for most goods and services at 20% unless they are zero-rated. The other form of VAT is reduced rate VAT that is 5% on some goods and services.

As you can see, the standard rate is higher than the flat rate so you need to be sure that your move is well-planned and that you are prepared for the shift in cost. The 20% charge is significantly higher than most flat rate fees, so your business will need to ensure it is ready to add more to its invoices while keeping an eye on expenditures.

Step 3: Review Legal and Regulatory Requirements

As outlined above, you will have to leave the VAT flat rate scheme if you don’t meet all of its criteria or if you meet any of the exceptions. This means you need to stay on top of your VAT returns, your expenditure, your income and your invoicing to ensure that you don’t accidentally go over the flat scheme maximum amount.

Once you’ve realised that the move from VAT flat rate to standard is the way forward, or if you choose to make this move voluntarily, then changing your VAT status is easy. You simply write to HMRC and notify them of your change in VAT scheme and the process will be automatically handled for you. Or, you can log in to your VAT online account [link to article on VAT online here] and submit a request online.

Note: HMRC may reject your application to change VAT scheme.

Step 4: Update Systems and Processes

Now that you’ve decided to change to a standard VAT rate, you’re going to have to change your accounting systems to ensure your invoices, VAT submissions, VAT returns and VAT charges are accurate. This means accurate record keeping that tracks invoices that fell under the flat rate VAT scheme and invoices falling under the standard VAT scheme and ensuring that you complete your VAT return meticulously until your entire system has been moved across to the new rate.

While changing scheme is quick and easy, it takes time for your systems to catch up. HMRC will helpfully send you information and support to help you make the move across to standard VAT and tell you everything you need to know, but be prepared for extra admin in the meantime.

Note: Accurate documentation and record-keeping is absolutely critical normally, but in this transition period give it extra attention.

Step 5: Communicate with Customers and Suppliers

In the month prior to you starting to add standard VAT to your invoices, notify your customers and suppliers of the change. This will directly affect their budgeting and their financial planning, so give them as much notice as possible. If you’re confident that HMRC will grant you the VAT change, then let people know from the moment you submit your application.

Step 6: Implement the Change

You will need to change how you fill in your VAT by including your Output Tax on all invoices you raise until you leave the flat VAT rate scheme and then you will change this to the new vat rate from the moment you actively can charge it. It’s a good idea to change scheme at the end of a VAT  return period as this will make your life a lot easier – if you leave in the middle, you will have to do two calculations and returns, one for each scheme.

Step 7: Test and Validate

Spend time working on your accounting platform prior to the move to your new VAT scheme to ensure your calculations are done correctly and that everything has been set up properly. You don’t want invoices going out with the wrong VAT charges, so take the time to adjust everything and test your systems before you move into your new VAT scheme. The last thing you want are VAT discrepancies that will cost you money and potentially earn you a fine from the tax authority.  

VAT Schemes Across the EU

In the table below, we have broken down the different VAT systems across the key EU countries of Germany, France and Italy and how these compare with the UK. While this table was created and checked as of January 2024, note that the regulations and rates may change, so always check the final figures with the relevant tax authority.

Post-Transition Activities

Follow this checklist to make sure you’ve covered all your bases and created a seamless VAT process for your business:

• Ensure that all transactions are updated to the correct VAT amounts.
• Allocate or delete all your outstanding payments on account to ensure your business is compliant and prepared.
• Re-check all invoices and amounts to ensure there are no discrepancies.

Case Studies

Blue dot has partnered with many global organisations over the years, equipping them with the data insights and tax expertise needed to manage their VAT reclaims compliantly across jurisdictions. For example, James Nguyen, Global Head of Procurement at global animal health company Zoetis explained that implementing Blue dot “effectively mitigated our high disqualification rate, increased compliance and maximised VAT reclaim opportunities.”

For leading travel management provider BCD Travel, having clear visibility and control over all Travel and Entertainment (T&E) expenses has been key to optimising their VAT management end to end:

“It is all about data, and Blue dot’s portal provides us with the reporting, analytics and business intelligence for our customers and ourselves to optimise processes and further increase the value we bring not only to our business but also to the compliance and savings of our customers.”Marcel de Wit VP Global Tax at BCD Travel

Adjusting Schemes with Blue dot Corp

Blue dot can provide you with professional advice and support, offering you VAT regulatory advisory and insights that are up-to-date and relevant. Our systems and solutions are designed to make it easier for your business to do business. We leverage artificial intelligence and automation to simplify VAT management and transform how you approach your VAT activities. We can help you manage your VAT perfectly, from claiming VAT mileage through to helping you calculate your VAT perfectly.

Our in-depth understanding of VAT across the UK and EU ensures we can provide you with the support you need to navigate VAT, manage cross-border VAT issues, and stay on top of your VAT requirements and obligations with ease. We ensure you remain compliant and informed so your business is always prepared for any changes or shifts within this dynamic regulatory environment.

Our VAT support extends beyond numbers as we offer you professional advice and support so you can operate internationally with peace of mind.