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VAT and the flat rate scheme

There’s no denying that tax can be complicated, especially when it comes to VAT, however, some business may be able to simplify their VAT accounting by joining the Flat Rate Scheme.


What is the Flat Rate Scheme?


When reclaiming or paying Value Added Tax to HM Revenue & Customs, this amount is the difference between the VAT you charge your clients and the VAT you pay on your purchases.


When using the Flat Rate Scheme you end up paying VAT as a fixed percentage of your VAT inclusive turnover.


It’s worth noting that the scheme will not affect the way in which you raise invoices at all, as it will still include VAT at the usual rate.  Being on the scheme will however mean that the amount of VAT payable to HMRC will be based on the gross invoice value at a reduced rate – a rate which is entirely dependable on the sector that you work in.


Am I eligible to join the scheme?


If your estimated net turnover is below £150,000 per annum you should be able to join, and can continue to stay so until your company’s income reaches over £230,000.


However, not everyone can sign up to the Flat Rate Scheme.  


Examples of those who are unable to join include those who:


•Were already in the scheme and opted out within the last 12 months


•Have been convicted of a VAT offence, or if you were charged a VAT evasion penalty in the last year


•Have a business that is closely associated with another company.


What can I gain from joining?


There are a number of benefits that come with using the scheme; firstly, being a newcomer will mean that you get a first year discount, receiving a 1% reduction in your flat rate percentage until the day before the first anniversary you became VAT registered.


Being part of the scheme means that you don’t need to make a record of the VAT every time you charge clients on every sale and purchase, therefore saving you valuable time that you can use on other aspects of your business.


Also, you don’t have to worry about following as many rules, as you don’t have to work out how much VAT you can reclaim, leaving you safe in the knowledge that you always know what percentage of your takings need to go to HMRC.


Any downsides?


Of course there are some downsides to the Flat Rate Scheme, as what works for one business will not necessarily work for another.  If you are a non-service company with a considerable amount of VAT inclusive expenditure, this probably won’t suit you due to the scheme preventing this VAT reclaim.


If your business regularly receives a VAT repayment under the standard VAT accounting, or you make a lot of zero-rated or exempt sales, once again the scheme may not be right for you and your business.


If you are unsure whether or not you would benefit from joining the Flat Rate Scheme it’s probably best to consult your accountant for further advice and information.


Can I leave the scheme at any time?


Yes.  You can leave whenever you want, although most people will wait until the end of their next VAT accounting period.


Of course there will be circumstances in which you must leave the Flat Rate Scheme, such as if you calculate that your turnover will reach more than £23,000 in the next 30 days alone.


Other examples of when you would have to leave the scheme is if you were to start using any other special schemes (i.e. the Capital Goods Scheme or Tour Operators’ Margin Scheme) or if you were to join an existing VAT group, or register for VAT as a division of a larger business


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