The flat rate VAT scheme was introduced by HM Revenue & Customs (HMRC) to help smaller businesses. When VAT is calculated on invoices the amount you must pay to HMRC is the VAT you have charged on your sales, minus the VAT reclaimed on qualifying purchases. This process requires you to record every invoice on a quarterly basis (when VAT returns are due). If you are eligible to join the flat rate scheme then you simply pay a percentage of your gross sales to HMRC.
What are the benefits?
When your business is taking its first tentative steps towards global domination, the flat rate scheme can provide peace of mind knowing what your VAT bill is going to be. Doing a quick calculation on your sales is easy and gives you a true reflection of what will be due.
HMRC give a 1% discount to all businesses on the scheme that are in their first year of VAT registration. This can be a reasonable saving at a time when money is your priority.
The simplicity of the scheme can provide a certain peace of mind knowing mistakes are far less likely. This can be comforting at a time when you may still be getting to grips with the bookkeeping and accounting processes required when starting a business.
Are there any disadvantages?
A flat rate scheme by its nature is based on industry averages. If for any reason your business doesn’t fall within what is considered the normal tolerance for your industry, then you may be better off sticking to more traditional invoice accounting. This situation could arise if all of your purchases are standard rate or you would normally receive a refund. It can also restrict the VAT you claim back on capital assets, as HMRC say this is already accounted for within the percentage allowed for your industry. If a capital asset (or group of assets on the same invoice) is worth more than £2000 then you can claim the VAT back in addition to the flat rate scheme.
The percentage must be calculated on your VAT inclusive sales figure.
Seeking advice from a qualified professional will help you to decide what is best for you.
What are the criteria?
You cannot have been part of a flat rate scheme in the previous 12 months. It doesn’t apply to businesses that use a margin scheme for VAT (usually if you are selling 2nd hand goods).
Your estimated net turnover for the next 12 months must not exceed £150,000. You must leave the scheme if your turnover rises above £230,000.
VAT laws are extremely complicated and mistakes can be costly. There are a large number of variations for different industries, rates and countries. If you are starting up and think the flat rate scheme could possibly save you money, then get in touch with the professionals at Taxaccolega, a low fixed fee accountant, for guidance on what is best for your individual circumstances. You can contact us on 08000 235 234 or by e-mail at firstname.lastname@example.org