How does the flat rate VAT scheme work?

If your business doesn’t have to pay much input VAT on its purchases, then it could make an extra profit using the flat rate VAT scheme. So even if it isn’t compelled to register as turnover is below £81,000 it could still be a good idea to register voluntarily.

Please refer to the free pdf report for full details and the key points are summarised below:

The flat rate scheme simplifies the VAT process and reduces the level of administration involved. You only have to include sales in the VAT return and don’t need to include your expenses.

To qualify, you need to have net taxable income (excluding VAT and non-UK sales) < £150k and you have to leave the scheme if total gross income (including VAT and non-UK) > £230k.

You collect 20% VAT on sales invoices from customers as normal, but you only pay the flat rate percentage on gross income to HMRC.

For example, for “Computer and IT consultancy or data processing” businesses, the rate of overall VAT is 14.5%. (with a 1% reduction to 13.5% in the first year for new VAT registrations). If annual sales before VAT are £40k, you collect 20% VAT from customers which is £8,000. But under the flat rate scheme you only pay 14.5% of the gross £48,000 = £6,960 which gives an extra profit of £1,040.

However, you cannot reclaim input VAT on purchases apart from on large capital items costing more than £2,000 incl VAT.

If you need help to register or maintain a flat rate VAT scheme then please contact us for a quote.

Categorized as VAT

By Mohammed Haque

Mohammed is a chartered accountant (ICAEW) with many years of experience in dealing with complex audit, accounting and tax matters.

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