VAT Flat Rate Scheme - What Is It All About?
You must register for VAT with HM Revenue and Customs (HMRC) if your business’ VAT taxable turnover is more than £82,000. The amount you pay to HMRC each quarter will be the difference between the VAT you have charged to your customers and the VAT you can reclaim on your supplier bills.
So what is the VAT flat rate scheme? The VAT flat rate scheme is an alternative way for small businesses to work out how much VAT to pay to HMRC each quarter. The flat rate scheme can reduce the time needed to complete accounting tasks and calculating tax.
To join the scheme your VAT turnover must be £150,000 or less (excluding VAT), and you must apply to HMRC.
With the VAT Flat Rate Scheme:
- you pay a fixed rate of VAT to HMRC of your VAT inclusive turnover. The actual percentage you use depends on your type of business eg 14.5% for accountants or lawyers or 5% for post offices.
- you keep the difference between what you charge your customers and pay to HMRC
- but you can’t reclaim the VAT on your purchases
- You bill a client for £1,000, adding VAT at 20% to make £1,200 in total.
- You’re an IT consultant, so the VAT flat rate for your business is 14.5%.
- Your flat rate payment will be 14.5% of £1,200, or £174.
VAT Flat Rate Scheme - Our Three Favourite Reasons To Do It.
The Three main reasons to do the VAT Flat Rate Scheme Are:
- The Flat Rate Scheme can save time and smooth cash flow. You don't have to record the VAT that you charge on every sale and purchase meaning you spend less time on your accounts, and more time on your business. You still need to show VAT on your invoices as you do for normal VAT accounting.
- You no longer have to work out what VAT on purchases you can and can't reclaim. With less chance of mistakes, you have fewer worries about getting your VAT right with HMRC. Therefore this mitigates the potential costs of a VAT enquiry.
- You always know what percentage of your takings you will have to pay to HMRC. Allowing you to save money, and have more predictability in your cash-flow forecasting!
Further benefits are:
- In your first year of VAT registration you get a one per cent reduction in your flat rate percentage until the day before the first anniversary you became VAT registered.
- The VAT on fixed asset purchases over £2,000 are allowed to be reclaimed which is an advantage for many businesses needing to invest for growth.
We have talked about the advantages of the VAT Flat Rate Rate Scheme, what are the potential disadvantages one should always consider? The flat rate percentages are calculated in a way that takes into account zero-rated and exempt sales. They also contain an allowance for the VAT you spend on your purchases.
So the VAT Flat Rate Scheme might not be right for your business if:
- you buy mostly standard-rated items, as you cannot generally reclaim any VAT on your purchases
- you regularly receive a VAT repayment under standard VAT accounting
- you make a lot of zero-rated or exempt sales.
Our VAT Flat Rate Scheme Call To Action
The VAT flat rate scheme is not advisable for all businesses. It is best to consult the VAT section of the HMRC website or speak to an accountant and ask them to run the numbers for you
If you know of any other reasons why the VAT Flat Rate Scheme is a good idea for business that can be shared with our readers then let us know via the comments or through LinkedIn.
Don’t be shy about going for the VAT Flat Rate Scheme. It is good for you, your bottom line and your business!
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