VAT flat rates reduction

HMRC has reduced VAT rates for hospitality and the flat rate scheme. VAT flat rates have been reduced for catering, accommodation and pubs in light of the government’s temporary VAT reduction.

As a consequence of the temporary reduction in the VAT rate from 20% to 5% in the hospitality sector, the flat rate percentages used for catering (including restaurants and takeaways), accommodation and pubs have also been reduced.

Work out your flat rate

The VAT flat rate you use usually depends on your business type. You may pay a different rate if you only spend a small amount on goods.

You get a 1% discount if you’re in your first year as a VAT-registered business.

If you spend a small amount on goods

You’re classed as a ‘limited cost business’ if your goods cost less than either:

  • 2% of your turnover
  • £1,000 a year (if your costs are more than 2%)

This means you pay a higher rate of 16.5%. You can calculate if you need to pay the higher rate and work out which goods count as costs.

If you are not a limited cost business, you use your business type to work out your flat rate.

Flat rates for types of business

Because of coronavirus (COVID-19) the flat rate for catering (including restaurants and takeaways), accommodation and pubs have been reduced from 15 July to 12 January 2021.

Type of business Flat rate (%) from 15 July 2020 to 12 January 2021Flat rate (%) up to 14 July 2020 and from 13 January 2021
Catering services including restaurants and takeaways 4.512.5
Hotel or accommodation010.5

Click here for VAT Advice and Compliance

Eligibility for the Flat Rate Scheme

You can join the Flat Rate Scheme if:

  • you’re a VAT-registered business
  • you expect your VAT taxable turnover to be £150,000 or less (excluding VAT) in the next 12 months

VAT taxable turnover is the total of sold items that are not VAT exempt.

What you pay

You calculate the tax you pay by multiplying your VAT flat rate by your ‘VAT inclusive turnover’.

VAT inclusive turnover is different from standard VAT turnover. As well as business income (such as from sales), it includes the VAT paid on that income.

Calculating 2 flat rates

The first calculation should start from day one of your accounting period to the last day of that flat rate. The second should start from the date of the new flat rate to the end of your accounting period.

Talk to one of our accountant or tax adviser if you want advice on whether the Flat Rate Scheme is right for you.

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