If you use the Flat Rate Scheme, you charge VAT to your customers (‘output VAT’) and pay VAT to your suppliers when you buy goods or services from them (‘input VAT’) in the normal way.
However, the VAT return figures are calculated differently. VAT on expenses is generally ignored; instead, the total sales including the VAT charged are calculated and you only pay a percentage of that sales figure as VAT to HMRC. The percentage varies depending on the type of business.
Sales includes any standard-rated, reduced-rated, zero-rated and exempt sales you make in your VAT return but sales outside the scope of VAT can be excluded.
Care is needed to avoid falling foul of the regulations – be especially careful if you are a “limited cost trader” defined as one whose VAT-inclusive expenditure on goods is either less than 2% of their VAT-inclusive turnover in a prescribed accounting period, or greater than 2% of their VAT-inclusive turnover, but less than £1,000 per annum. A flat rate of 16.5% applies in these circumstances.
There are turnover limits to be eligible for the scheme- estimated VATable sales for the next year must be under £150,000, and once you join the scheme you can keep using it until your total business income goes above £230,000 a year.
Is it beneficial for you? It depends….. and some calculations need to be done regularly. As with anything VAT related, there are lots of “fine print” and other detailed rules, but if you would like to know of this might be beneficial in your circumstances, contact us to review your situation.
