If you’re a small business owner and you’re looking for a VAT scheme that’s highly relevant to you, the VAT flat rate scheme could be for you. This is designed specifically for small businesses. So follow my video or read below, where I explain the basics for you.
When you’re running a business and you’re VAT registered, it can be a burden; when you’re collecting all of the information allowed to VAT, there’s an extra administration attached to it.
HMRC designed a special scheme to help small businesses: the flat rate scheme. If you are registered under this scheme, instead of calculating all of your output VAT, which is VAT on income, and all of your input VAT, which is the amount you can claim off your costs, this takes your income and works out a percentage. You will pay this percentage regardless of whether they’re up or you’re up.
Who can register?
You can register for this scheme if your turnover is under £150,000, which can be quite a bit for a small business, so it gives you some leeway. This can be beneficial for small businesses as this saves them a massive amount of time and also less financial risk by having one percentage rate.
How is this calculated?
Now one thing to bear in mind with this is when we talk about VAT, generally for businesses; we talk about amounts that are charged on a net basis. So, if you have a product or service that’s £1000, you will charge the VAT on that amount, which means with the standard rated VAT, this will be £1200. The flat rate scheme can be a bit confusing here because the flat rate is calculated based on the gross amount. The gross amount means the net amount of your sale plus your VAT; you are taking a flat rate percentage from this amount, not the net amount.
It’s an easy trap for business owners to fall into because a lot of people will compare like: “I’m charging 20% on the net”, but you’re actually taking 14% of the gross or 12%, whatever your classification is. You will be taking that percentage of the gross figure, not the net figure, if you’re comparing to see how much VAT you are saving.
Just remember you may be comparing an apple with an orange. Because if you’re comparing the gross to the net, they are going to be different.
One thing to bear in mind I also talk about this in a previous video: VAT basics, keep an eye on your turnover as it goes month by month on a rolling basis.
Benefits of the flat rate scheme
Well, some of the pros of a flat rate scheme are that you can actually make more money. So, what you could do is you’ve work out all your VAT on your sales, less your costs, and you’ll have what your VAT return would be if you did it on a standard basis. This scheme may mean you have to pay less than what you’re required to at the standard rate. However, the difference is classified as an income, and this needs to be shown on your profit and loss account because this is a profit that you made under the flat rate scheme. HMRC is well aware of this because they’ve taken general percentages.
The flip side of this is you might be in a business where you lose, and you might have to pay more VAT than you should have if you’d done it on a standard basis.
So if you do, you’ve got two things to weigh up, I think in my opinion:
1. Time – Is the time you save by managing your VAT by the flat rate scheme worth it than doing it on a standard basis? If you are losing consistently through the flat rate scheme, you can change the scheme and go back to a Standard VAT scheme. But overall, the main benefit of the flat rate scheme is it’s quicker. You just work out your income for VAT and take a percentage that you are classified in.
2. Reduced Risk: There are many business owners out there that are genuinely frightened of HMRC inspections. But if you have a flat rate calculation, that’s really easy; if HMRC inspects your VAT return, you just need to give them your invoices. It’s the quickest calculation to see whether you’re doing it correctly or not. So one of the benefits is that it takes away some of the fear you have around the risk of an HMRC inspection.
The types of flat rate scheme
HMRC have a specific document, especially for flat rate businesses, that have classified different business types into certain flat rate percentages. It is down to you or your accountant, or advisor to have a look to see where your business is classified on their list and use that percentage; it really is that simple.
How to register?
Registering for the flat rate is really simple; it’s just one form online, a notification to HMRC saying that you are flat rate registered for VAT. Also, in your accounting software, you should be able to set the flat rate percentage you are using; this makes the calculation a lot quicker, a lot simple and a lot more accurate.
My question is, are you at the appropriate turnover level where the flat rate could benefit your business? Have you not considered this at all?
If any questions come up, I’d be happy to jump on a call or a Zoom with you and take on board any questions you have. Click the link below to book your call today!
