The Flat Rate VAT Scheme – What is it?
If you are registered for VAT did you know that you could benefit financially by registering for the Flat Rate Scheme as well? To reduce the cost of complying with VAT obligations, the government introduced the Flat Rate Scheme and you can actually profit from charging VAT.
Integro Accounting are experts in contractor accountancy and we help contractors just like you get to grips with all facets of the world of taxation. To find out more about our services and the Flat Rate Scheme, call us on 01242 504510 or 0207 096 2659.
The Flat Rate VAT Scheme Explained
The standard rate of VAT is charged at 20%, however under the Flat Rate Scheme you can pay HMRC back at a reduced rate. Consequently, you can actually profit from charging your clients VAT on your invoices.
The percentage at which you pay VAT back to HMRC is known as your flat rate and this will vary according to the industry you work in. Furthermore, in your first year of being registered on the scheme your flat rate is reduced by a further 1%.
As long as you are registered for VAT and your turnover is £150,000 or less a year, you can register for the Flat Rate Scheme.
What is a Limited cost Trader?
Contractors who fall into the definition of Limited Cost Trader (LCT) use a flat rate of 16.5%, regardless of which industry they’re in. You class as a limited cost trader if your expenditure on “relevant goods” is either less than 2% of your turnover, or less than £1000 a year.
Some items are specifically excluded from the definition of “relevant goods”. These include:
- Food and drink,
- Vehicles, vehicle parts and fuel
- Capital expenditure on equipment
This means that a great many contractors will be classed as LCTs, which in most cases significantly reduces the benefit of the flat rate VAT scheme.
However, in your first year of trading you get a discount of 1%, meaning even LCTs use a flat rate of 15.5%. For this reason, we often advise new contractors to register for the flat rate VAT scheme even if they are classed as limited cost traders.
For example, on an annual contract income of £100,000 a flat rate of 15.5% would result in a gain of £1,400. Without the 1% discount the gain would be just £200.
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A working example of Flat Rate VAT
Let’s say that you are a dry cleaner in your first year of being registered on the scheme. Your standard flat rate is 12%, but as you are in your first year on the scheme you get a 1% reduced rate, so your flat rate for this year is actually 11%.
This means that you charge VAT at a rate of 20% but pay it back to HMRC at a rate of 11% – it’s easy to see that you can generate considerable profits from charging VAT with numbers like that.
Let’s say you have done the dry cleaning for a suit hire company and you send them an invoice of £5,000, plus 20% VAT, so a total of £6,000.
Under the Flat Rate Scheme, you pay VAT back at a rate of 11% on the £6,000 – meaning you pay HMRC £660 in VAT on this particular invoice. However, you charged £1,000 in VAT to the client, so you have actually made a profit of £440 from being Flat Rate registered
A few invoices like this a year and you might just be able to afford an extra holiday on the profits.
Calculating your Flat Rate Percentage
Your flat rate percentage will vary according to the industry you work in. To find out what your flat rate percentage is, visit the HMRC website or call our friendly accountants and we’ll be happy to help.
You should now have a much clearer understanding of the Flat Rate VAT Scheme and the financial benefits that it can bring. To find out more about how you can register for the Flat Rate Scheme or to appoint us as your accountants, call our friendly experts on 01242 504510 or 0207 096 2659.
Why choose Integro Accounting?
Integro Accounting provide a fixed fee limited company accountancy service to contractors, freelancers and consultants. Integro accounting was founded on the word integrity. Clients rate us 5/5 on Google and we pride ourselves on building a completely transparent and personal relationship with our clients. For just £100 + VAT per month, you can have a partner integral to your contracting career.
- All-inclusive price – no hidden charges, one comprehensive package.
- A dedicated accountant – one person who will support you every step of the way.
- Unlimited face to face meetings – offices available across the UK.
- FREE award-winning accountancy software – a FreeAgent license provided to all clients.
- 24/7 access to your accounts – complete visibility of your accounts whenever and wherever you are.
Speak to one of our expert accountants today on 0207 0962659 or email email@example.com for more information on how we can help you.