Flat rate VAT is a scheme introduced by HMRC to help businesses simplify their VAT accounting, in turn reducing the amount of time spent on calculating their liabilities.
Many business love the sound of a reduced rate in VAT…but is it worth it?
The flat rate VAT scheme allows businesses with a VAT inclusive turnover of under £150,000 to calculate their VAT liability by applying a percentage to their VAT inclusive turnover. The rate is lower than the standard 20% and can vary between 4% and 14.5% depending on the sector in which your business operates. HMRC also offer a 1% reduction in the reduced rate for the first year of VAT registration, which is a great benefit for those new to the scheme. The downside is that you won’t be able to reclaim VAT on any purchases, except for capital assets worth more than £2,000.
The flat rate scheme can offer many benefits for businesses such as:
- Smoothing your cash-flow as you know what VAT you need to pay on your takings.
- You don’t have to record the VAT you charge on every sale and purchase, reducing the time spent on the books.
- A first year discount if you are in your first year of VAT registration until the day before the first anniversary you became VAT registered.
- Fewer rules, so less time working out what you can and can’t reclaim.
- Less chance of mistakes, so peace of mind that you are doing it right.
An assessment would need to be conducted to calculate whether the reduced rate compensates for not reclaiming the input VAT. The results could vary from business to business as most businesses operate differently to others even in the same sector. As a general guideline, the scheme may not benefit you if:
- You buy mostly standard-rated items, as you cannot generally reclaim any VAT on your purchases.
- You regularly receive a VAT repayment under VAT accounting.
- You make a lot of zero-rated or exempt sales.
Green and Co have helped many businesses to comply with VAT regulations as efficiently and effectively as possible for many years and are always considering different ways for our clients to save money. If you are interested in how best to tackle VAT in your business, or for more information on other services we provide, please call us on 01633 871122 or visit our website.
Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.