VAT savings with the flat rate scheme
If the value of your annual sales is below £150,000, you may be able to save VAT by using the flat rate scheme. Many businesses have taken advantage of the VAT savings and reduced their annual VAT bills by thousands of pounds in some cases. The scheme also simplifies the process of completing VAT returns.
The basic principle of the scheme is that you still charge VAT to your customers at the relevant rate (currently 15% for standard rated sales) and still pay VAT to your suppliers on the expenses that you incur. However, instead of paying tax based on the VAT charged to your customers (output tax) less VAT paid to your suppliers (input tax), the VAT payment is calculated as a flat rate percentage of your gross (VAT inclusive) income. The specific percentage depends on your category of business.
Example
John is a management consultant and his sales for the period ended 31 March 2009 will be £35,000 plus VAT of £5,250, ie £40,250. The VAT on his expenses will only be £200. Under normal VAT accounting, John would pay VAT of £5,050, ie £5,250 less £200.
The relevant flat rate percentage for ‘management consultants’ is 11% – so John’s VAT bill under the flat rate scheme would be £4,427.50, ie £40,250 x 11%. He has saved £622.50 of VAT, an annual saving of £2,490.
The scheme produces winners and losers. John had a good outcome in the above example because he does not have much VAT to claim back on his expenses.
Other issues
There are a few important points to remember about the scheme:
The flat rate percentage is applied to all your sales – including sales that are zero-rated or exempt from VAT. This could mean the scheme is not suitable for your business.
The flat rate percentages are reduced by 1% in the first year that a business is VAT registered.
You are required to check that your category of business has not changed in the last year as the flat rates vary. You should review your category each year on the anniversary of when you joined the scheme.
Contact us to find out if you are eligible to use the scheme and whether it could save you tax. There is a simple application form that we can help you to complete.