VAT Flat Rate Scheme – Don't look a gift horse in the mouth

Posted 2013 by admin

Are you aware of the Flat Rate Scheme for VAT and potentially how much VAT this could save you?

This is such a good scheme that I have actively encouraged some businesses below the vat threshold to voluntarily register just so that they can benefit from the savings that it offers.

A normal VAT registered business will pay over to HMRC the VAT that it collects from its customers, after deducting the VAT that it has been charged by its suppliers. The business is simply acting as an unpaid tax collector for HMRC and other than cash flow implications, the VAT is neither a cost or an income.

However, under the Flat Rate Scheme, the business continues to charge its customers VAT at 20%, but by agreeing to forego the VAT it pays to its suppliers, it only pays only a lower % of its VAT inclusive turnover to HMRC. The % depends on the nature of the business and the rates are set out on the HMRC website.

And as a further incentive, in the first year of VAT registration the % is discounted by a further 1%.

In many cases that I have seen this is a real “no brainer”.

An example may help:

A florist has an expected VAT exclusive annual turnover of £100,000 in year 1 on which she charges VAT at 20% or £20,000.

She joins the VAT flat rate scheme and is required to pay VAT at the rate for florists of 7.5%, less 1% in the first year ie 6.5%. So the VAT she actually pays to HMRC is 6.5% x £120,000 = £7,800.

Therefore, as long as her input VAT on expenses did not exceed £12,200 (£20,000-£7,800) she must be better off in the scheme by potentially as much as £12,200.

The scheme only applies to businesses with a VAT exclusive turnover of £150,000 per annum, although once in the scheme you do not have to leave until your VAT inclusive turnover exceeds £230,000.

In some cases, for example, where capital goods costing more than £2,000 (VAT inclusive) are purchased, the input VAT can be reclaimed.

If your business currently has a turnover of less than £150,000, I would seriously suggest that you or your accountant review the figures to see if it can save you money.

If you would like to discuss the matter further or would like our assistance with that calculation please get in touch.

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