19 Apr

VAT Flat Rate Scheme

The VAT flat rate scheme was introduced back in 2002 as a way of simplifying your VAT records and obligations. Things like ‘vat’ and terminology such as ‘flat rate schemes’ may seem dull. But as your accountants, it’s important that we alert you to these thing as they will help you run a better business.

The VAT Flat Rate Scheme is one way in which it can make things easier. It will cut down on your paperwork, reduce the time you spend on bookkeeping and can, potentially, earn you’re a bit of extra income.

How does it work? The name gives it away, it’s based on a single ‘flat rate’ percentage that’s applied to your gross sales to calculate your liability. Meaning the flat rate scheme is relatively easy to use.

Once you’re registered for the scheme, you no longer need to record and analyse out the net, VAT and gross amounts from each of your purchase invoices- saving you an awful lot of time. Instead you only need to do this for your sales invoices. Which, in theory, if you raise your invoices through an accounting software this should be done for you automatically.

So how is your liability calculated? You just take your gross sales for the period and multiply this by your allocated flat rate percentage (this is determined by the industry sector that you work in but typical percentages range from 4% to 14.5%). The figure you arrive at will be your liability to pay HMRC. If you apply for the scheme within 12 months of your VAT registration then you’re eligible for a further 1% reduction on your flat rate percentage.

Let’s look at this in reality: XYZ Ltd is a VAT-registered company.

They’ve applied for the flat rate scheme and are given a flat rate percentage of 12%. Which is discounted to 11% as it’s their first year of registration.

In the first quarter they have raised invoices totalling £20,000. With VAT applied at 20%. Working out at £4,000.

So overall XYZ Ltd.’s gross sales are £24,000.

Now, to calculate their liability we take the gross sales at £24,000 and multiply this by 11%. The total VAT liability for the quarter would be £2,640. The difference between the VAT liability and the VAT charged is £1,360. Meaning an extra £1,360 income for XYZ Ltd just for signing up for the scheme.

Ask yourself:

  • Does your company mainly provide services to customers?

  • Do you have very little expenditure in terms of purchases that have VAT applied to them?

If so, then you could make a financial gain from being on the flat rate scheme.

If you’re worried about losing out on the vat from large purchases in the future. Then don’t worry- all is not lost. When you spend over £2,000 on capital purchases you can make some additional savings. If the total cost (this can include VAT) is equal to or exceeds £2,000, then you can also reclaim the VAT on these items too!

There’s one small limitation you need to bear in mind before deciding if you are ready to join the scheme: You can only join the flat rate scheme if you predict your turnover will be less than £150,000 over the next 12 months.Once you’re accepted on to the scheme, you’re able to earn up to £230,000 before you’d have to leave.

So, signing up for the VAT Flat Rate Scheme seems like a no brainer, but as with any profits that your company makes, HMRC will want a slice of the cake too. Any gains that you make from the scheme will form part of your overall income and net profit, so you’ll need to pay corporation tax on this amount. But, overall, you’ll still be making a gain and increasing your bottom line.

If you can meet the above requirements then the VAT Flat Rate Scheme is worth looking into. It’s easy to calculate and it could increase your income!

Get in touch with us if you are interested or have any questions on the VAT flat rate scheme!

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