Q. I have recently registered for VAT. I am not very good when it comes to administration and I have heard that the flat rate scheme might help me. How does the scheme work?
A: Broadly, the flat rate scheme for VAT is designed to help small businesses with a turnover of no more than £150,000 a year, excluding VAT, by taking some of the work out of recording VAT sales and purchases.
With the flat rate scheme: - You pay a fixed rate of VAT to HMRC; and
- You keep the difference between what you charge your customers and pay to HMRC; but
- You can't reclaim the VAT on your purchases - except for certain capital assets over £2,000.
The percentages applicable to this scheme currently vary between 4% and 14.5%, depending on the nature of the services provided. Full details of the scheme are included in the HMRC VAT Notice 733: Flat rate scheme for small businesses, which you can download from the HMRC web site.
In your first year of VAT registration you get a 1% reduction in flat rate, which means that you can take 1% off the flat rate you apply to your turnover, until the day before your first anniversary of becoming VAT registered.
The scheme works well for some but not others. On the positive side, the scheme may save you some admin because you don't have to work out every item of input and output tax, but if your customers are VAT registered, you do have to calculate the VAT and issue VAT invoices in the normal way. Financially, the flat rates averages may work out cheaper for you than normal accounting or you may find this scheme more expensive.