Did you know that if you have a VAT registration, you can benefit financially by registering to the Vat Flat Rate Scheme. The government has introduced the Flat Rate Scheme to reduce the costs of complying with the VAT obligations. You can even profit by charging VAT.
We have created a guide for consultants, contractors, and freelancers that explains the advantages of the Flat Rate Scheme. Let’s get right to it. . .
What is the flat rate VAT scheme (FRS)?
Businesses can calculate VAT more easily with the Flat Rate Scheme. This scheme is designed to reward businesses with low expenses by allowing them to pay HMRC a fixed percentage.
You don’t have to pay input or output VAT. Instead, you pay a flat percentage of your invoices.
Your flat rate will depend on the type of business you are in. It can be anywhere between 4% to 14.5%.
You can charge your customers VAT on invoices, as you will be paying HMRC at a lower rate.
What is the Flat Rate Scheme?
With the Flat Rate Scheme, you can calculate your VAT included in your invoices to clients, regardless of whether you paid or were charged VAT.
If you invoice your customer for £1,000 and add 20% VAT, you’ll receive 1£,200 . Your payment to HMRC would be 14% of £1,200 , which is £168.00. You will save £32.00 on VAT.
In addition, your flat rate will be reduced by another 1% in the first year after you have been registered. Continuing with the example above, you have now made£ 44.00 more on this invoice.
What is the flat rate VAT scheme?
You can find a list of all the percentages here: Flat Rate VAT Scheme rates or give us a ring on 0208 133 4599 and we will be able to advise you on which rate is best for your business.
Does the Flat Rate Scheme work for your business?
If you already have a VAT number and are expecting a turnover of less than £150,000. (excluding VAT) over the next 12 months, this scheme could be suited to your business. You can stay on the scheme until your business’s total income, including VAT, exceeds £230,000 per year.
You won’t be allowed to join the club if you:
- If you’ve previously been part of the scheme, but it hasn’t been 12 months since then, you’ll need to wait for a year before you’re eligible to rejoin.
- If you have been charged with a penalty or found guilty of a VAT offence in the past 12 months,
- You are or have been a member (or potential member) of a VAT group, or you have registered for VAT in conjunction with a larger company.
- You use a second hand margin scheme (a new way to account for VAT).
- You are closely related to another business
If you don’t charge VAT because your clients aren’t in the UK, then a flat rate scheme may not be for you. Speak to your accountant.
What are the advantages of the VAT Scheme?
Simpler things make life easier! This scheme makes it easier to keep records because you don’t need to calculate the VAT on your purchases. Keep receipts for all your purchases.
The scheme, while not designed to do so, can earn you extra money for your small business, as it will allow you to charge at the standard rate and pay HMRC at the flat rate.
You can save even more money if you use the flat-rate scheme in the first year.
Is the flat rate VAT scheme beneficial to a Limited Company or Self-Employed Individual?
You can join the Vat Flat Rate Scheme as long as you have a VAT registration and you meet the turnover requirements. Your accountant will usually register your business for you, or you can fill out a simple application form and email it directly to HMRC. You can find more information here: Joining Vat Flat Rate Scheme.
Contractors who meet the definition of Limited-Cost Traders (LCT) pay a flat 16.5% rate, regardless of their industry. Limited cost traders are those who spend less than 2% or less than £1000 per year on “relevant goods”.
Certain items are excluded specifically from the definition “relevant goods”. This includes:
- Food and Drink
- Fuel, vehicles and vehicle parts
- Capital expenditure on equipment
It means that many contractors are classified as LCTs. This reduces in most cases the benefits of the VAT flat rate scheme.
In your first year, you will receive a discount of 1 %, which means that even LCTs pay a flat rate of 15.5%. We often encourage new contractors to sign up for the flat-rate VAT scheme, even if they’re classified as limited cost traders.
On a contract income of £100,000. A flat rate of 15% would result in an increase of £1,400. The gain would only be £200 without the 1% discount.
The percentage of the cost you will need to pay and your business type will determine how much you can benefit.
If you meet certain criteria, it is likely that your chances of success will be high, whether as a contractor, consultant or freelancer.
The Vat Flat Rate VAT Scheme can be discussed to determine if it is beneficial for you and your company, how much and how to enroll. We want our clients’ businesses to be successful and profitable, and the Flat Rate scheme is a good way to achieve this.
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