Flat rate VAT scheme

Flat rate VAT scheme


 
The flat rate VAT scheme is a little known but often very beneficial scheme that simplifies the VAT process and can lead to significant income advantages for certain types of businesses. Under the scheme you charge VAT at 20% on your invoices but pay over VAT to HMRC at a lower rate, between 4% and 14.5% of gross sales. The catch being you cannot reclaim VAT on purchases.

Flat rate VAT is very popular with freelancers, contractors, consultants and people in service industries. Anyone in a business with relatively low costs compared to sales may benefit significantly from the scheme.

How does flat rate VAT work in practice:

Let’s imagine you are an IT contractor who’s currently not VAT registered. You have sales of £30,000 a year and you spend £2,400 a year including VAT on various expenses.

Non-VAT registered: Profit £27,600

Sales of £30,000 less expenses of £2,400 gives a profit of £27,600.

Standard VAT scheme: Profit £28,000

You charge VAT at 20% on your £30,000 of sales giving gross sales of £36,000. This £6,000 of VAT is payable to HMRC. However, you can also reclaim the VAT on your expenses of £2,400 i.e. £400, giving you a total amount payable to HMRC of £5,600. Your total profit is therefore £28,000 being £36,000 less expenses of £2,400 less VAT payable of £5,600.

Flat rate VAT scheme: Profit £28,740.

Again you charge VAT at 20% on your £30,000 of sales giving gross sales of £36,000. However you only pay HMRC VAT at a rate agreed for your industry, in this case 13.5% (in your first year of trade). You pay HMRC 13.5% of your gross sales which is £4,860. You cannot however normally reclaim the VAT on your purchases.£ Your total profit is therefore £28,740 being £36,000 less expenses of £2,400 less VAT payable of £4,860.

Therefore in the above example by registering for flat rat VAT your profit increases by £1,140 compared to not being VAT registered.

There are conditions attached to the scheme. The key ones being that to join the scheme your estimated turnover excluding VAT in the next year must be under £150,000 and once your turnover exceeds £230,000 including VAT you have to leave the scheme.

To find out more about how the flat rate scheme could benefit your business please get in touch with Norton Accountancy for a FREE consultation in our London, Cardiff, Newport or Bristol offices on the numbers at the top of the website. You can also email us at contact@nortonaccountancy.co.uk to arrange your FREE VAT consultation.