Businesses can use the flat rate scheme to simplify their VAT calculations. It can also save them money by reducing the amount of tax payable to HMRC.
Under the normal accounting rules, you charge VAT on your standard rated sales. Next, you deduct VAT that you have paid to your suppliers and pay the difference to HMRC. This can be a complex calculation, as there are lots of rules on what VAT you can and cannot recover from supplier payments.
Under the flat rate scheme, you pay a fixed percentage of your income to HMRC. You still charge your customers 20% VAT. You then multiply your gross income (sales income + 20% VAT) by the flat rate percentage for your industry. This is the amount you pay to HMRC; you do not have to calculate the amount you have paid to your suppliers.
You can find the flat rate percentage for your business on HMRC’s website.
The scheme is open to registration for businesses whose turnover is less than £150,000. Businesses with a turnover of greater than £230,000 have to leave the scheme.
Who can benefit?
Anyone looking to simplify their bookkeeping and reduce the risk of recovering the wrong amount of VAT on their purchases. Also, there can be a cashflow advantage to joining the scheme. This comes when the rate of VAT you have to pay is lower than the amount you would pay if you calculated your tax using the normal rules.
Who would not benefit?
The scheme does not make sense for businesses whose purchases are less than 2% of their turnover. This is because there is a high fixed percentage for these businesses, which means that they will be likely to pay much more VAT using the flat rate rules in comparison to using the normal rules.
How do I register?
VAT registered businesses can apply to join the flat rate scheme on HMRC’s website. However, with all VAT applications, we suggest speaking to your accountant first. This is to ensure that registration is the right choice for you and to help you make the application correctly.
To find out more about the flat rate scheme contact our team, by calling 01823 617580 or emailing info@jprata.co.uk .