Does your business earn less than £150,000 per year (excluding VAT)? If the answer is yes, you may be eligible for the government’s VAT flat rate scheme . This lower VAT rate varies according to the industry that you are in. This scheme is entirely optional. Read on to find out more.
As part of the scheme you charge your customers the normal VAT rate (20%) but pay a lower VAT rate on those same sales back to HMRC.
(Note that the lower VAT rate is applied to a business’s gross income, rather than its individual sales). Your company keeps the difference.
Benefits of using Vat flat rate scheme
The result should be improved cash flow and easier record keeping, since the amount you pay is based on gross income and therefore less detailed records are required for VAT payment purposes. However if your customers are also VAT registered, you will need to issue VAT invoices in the normal way.
If you use this flat rate scheme, you cannot reclaim any VAT on purchases, except for on single purchases of capital assets that exceed £2000.
Other things to be considered include the nature and setup of your current business. The VAT Flat rate scheme is not compatible with the Cash, Retail and Margin for Second Hand Goods Schemes, however it is compatible with the Annual Accounting Scheme. Also, you cannot usually claim Input Tax on the scheme (except for individual purchases of capital that exceed £2000).
And if you buy or sell outside the UK, there are further considerations and adjustments to be made in calculations. HMRC also requires income forecasts to apply for the scheme, and for these to be made on reasonable grounds, else they could withdraw your company’s eligibility for the scheme. And your company must not be part of a VAT group, nor be an “associated” company. There are also certain conditions under which a business must leave the scheme, for example when its profits exceed a certain level.
A company in its first year of VAT registration is also eligible for a further 1% reduction on its lower tax rate, but for the first year only.
For more information you are welcome to contact us.
Written by Ranjit S. Dhaliwal, Trainee Accountant at Advantax Accountants.