I am a business analyst contractor working through my own limited company and am considering registering for VAT on the flat rate scheme. I am unsure which category is the best fit for my business – how do I choose the right category and what happens if I get this wrong?

VAT Flat Rate Scheme - which percentage category to choose

Answer, August 2016

Many limited company contractors choose to register on the VAT flat rate scheme as it offers the benefit of being a simple scheme to administer and often additional profit can be made compared to the standard scheme, although remember that this profit is chargeable to corporation tax.

The problem, as you state, is choosing which flat rate category is the best fit for your business.

You need to select which category is the closest match to your business activities and if you have more than one type of business activity, the flat rate category should reflect the one that generates the highest level of income.

It is very important that you make a note in your files as to the reasons why you have chosen the category – this is necessary in case you ever need to show HMRC why you decided the category you had chosen was the best fit.

HMRC’s VAT Notice 733: Flat Rate Scheme for small businesses covers the issue of choosing the correct VAT sector and section 4.2 says:

HMRC will not change your choice of sector retrospectively as long as your choice was reasonable. It will be sensible to keep a record of why you chose your sector in case you need to show HMRC that your choice was reasonable.

Going back to the question at hand and choosing which category is the best fit for business analyst services, if you look through the list of categories there does not appear to be one that suits this very well which may lead you to consider that the category that is the best fit is ‘Business services not listed elsewhere’  but you will be best placed to decide this for yourself.

If in the future HMRC challenged your choice of flat rate sector, as long as your choice was reasonable then they should only seek to amend the category going forwards rather than historically.

UPDATE – IMPORTANT:

On 23rd November 2016 HMRC announced changes to the flat rate scheme from April 2017 with regards to a new flat rate scheme category, the ‘limited cost trader’ – we have written an article below which should be read in conjunction with this article:

VAT Flat Rate Scheme Changes 2017 – Limited Cost Traders