VAT – will your business benefit from the flat rate scheme?
As an SME, whether you are self-employed or a limited company, if your turnover becomes above £82,000 (£81,000, 2015) then you are obliged to register for VAT. You are therefore obliged to charge VAT on your sales, at the going rate, currently 20%, and claim VAT on your expenses accordingly.
At the end of the month, quarter or year you must prepare a VAT return and pay the net VAT due to HM Revenue & Customs. The net VAT due is the VAT on your expenses off-set against the VAT on your sales.
If your turnover is below £150,000 during the year, you could opt to use the flat rate scheme. A very important benefit of using this scheme is that you do not have to keep the records of your sales or your expenses, as the VAT you pay is a percentage (the rate applicable to your type of business) on the total gross turnover. However, please do not throw away your records as you will need to keep them as per the regulations for self assessment and/or corporation tax. You will, however, have to keep charging and showing the standard rate of VAT and the standard VAT amount separately on your sales invoices as per normal.
Another benefit for those that have registered and are opting to use the scheme within their first year of VAT registration is that you benefit from a reduction from your specific rate by 1%. The rate is then changed back to the normal rate specific to your business after the first year of your VAT registration date. The scheme is not ideal for those businesses who sell zero rated or exempt goods or services.
Below are a reserved number of examples of businesses and their corresponding rates if opted for the flat rate scheme:
- restaurants and takeaways 12.5%
- IT consultants 14.5%
- computer repairing 10.5%
- estate agents and property management 12%
- media production 13%
- building and construction services 9.5%
- hairdressing and beauticians 13%
- hotels 10.5%
- security services 12%
- dry cleaning services 12%
- legal services 14.5%
- vehicle repairs 8.5%.
Generally, if you can’t relate your business activities to any of the items on the list provided by HM Revenue & Customs, a rate of 12% is considered a sufficient rate to use.
Please see the HM Revenue & Customs website for up to date rates.
About the author
Alom is an Incorporated Financial Accountant and a Qualified Practising Member of the Institute of Financial Accountants. He has been in the accountancy industry since 2002. Throughout the years, he has gained a vast amount of experience in evaluating sole trader and partnership clients to assess whether they would be better off incorporating.
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