Flat Rate VAT: Could your small business save more tax?
Flat rate VAT isn’t for everyone and there are both benefits and drawbacks to the scheme. Here’s how it works and how it applies to small businesses.
Basically, the flat rate VAT scheme is a simplified means of recording and paying VAT. It can also, in a number of cases, result in you paying less VAT to HM Revenue & Customs than you would for a traditional VAT calculation.
The simplicity comes from not having to split out the VAT on your purchases – no longer do you have to think ‘Can I claim for this?’. Instead, you record your purchases as if you weren’t VAT registered. You still charge your customers VAT at the normal appropriate rate – normally 20%.
When it comes to calculating the VAT to be paid over, you add your VAT to your sales and then multiply by the flat rate percentage applicable to your business. As an example, if you had sales of £10,000 and a flat rate VAT percentage of 9%, the VAT payable would be 9% of £12,000 or £1,080, instead if the £2,000 you have charged your customers.
The extra profit comes through looking at your purchases. In the above example, if you had VAT on purchases in the quarter amounting to £250 then under traditional VAT accounting you would subtract this from the VAT on sales leaving £1,750 to be paid across. The flat rate scheme would only pay across £1,080, leaving you an additional £670 profit. You can also receive a first year discount of 1% on the amount of VAT to be paid over. Now your chances of getting 9% and making this level of profit are linked to your business type. The most common use is with consultants who would currently pay 14% of gross sales, but this would still provide you with a surplus of £320 to set against VAT expenses using the above example.
Flat rate VAT is not profitable for everyone. It depends on the level of your purchases, your business sector (as different sectors have different flat rate percentages) and your sales. As an example, if you normally receive a VAT repayment, this scheme would not be for you. Similarly, if you sell to clients in Europe or use a lot of subcontractors to deliver your services, then flat rate VAT won’t be profitable. It’s quite easy, though, to work this out.
We can prepare a calculation as to whether flat rate VAT would be good for you for a fee of only £74 + VAT. You’d need to send your last couple of VAT returns and of course the advice comes with the caveat that it is based on your past activities. If you change things moving forward then you’d need to review whether flat rate VAT is still beneficial.