VAT Flat Rate Scheme

What is the flat rate scheme and more importantly how can it benefit my business?

When a business reaches a turnover of more than £83,000 (correct at 19-10-16), they must, by law, register for VAT in the UK. The amount of VAT that the business then pays to HMRC (or claim back) is then normally the difference between the VAT they charge to customers and the VAT they pay on their own purchases. However businesses can voluntarily register for VAT at any time below the mandatory threshold and in most instances we recommend that our limited company contractors register for the Flat Rate Scheme. The Flat Rate Scheme differs from the standard VAT scheme in that you pay a fixed rate of VAT to HMRC based on your business sector and you keep the difference between what you charge to your customers and what you pay to HMRC. The only drawback to that is that you cannot claim VAT back on purchases except for certain capital assets over £2000 but generally contractors have few purchases to offset against their sales so therefore greatly benefit from this scheme.

So for example you are a limited company IT contractor and you charge the end client £200 per day or £1000 per week. You then charge your client VAT on top of these services at 20% and receive payment of £1200. As you are a IT Consultant your flat rate VAT rate is 14.5%. You therefore pay HMRC 14.5% of the £1200 so £174 out of the £200 VAT you charged your client. Therefore your company has additional income of £24 per week and over the space of a year this would work out at £1152 extra income!

You can only join if your company’s anticipated turnover for the next 12 months is going to be less than £150,000 and you are a VAT registered business. You will have to leave the scheme if your turnover rises above £230,000 once on the scheme and you cannot rejoin for a period of 12 months after leaving the scheme if your circumstances change.

In the first year of joining the scheme you also receive a 1% discount on your flat rate percentage.

Some examples of flat rate percentages are as follows: