The flat rate VAT scheme offers contractors and small businesses with an annual turnover of less than £83,000 an opportunity for significant tax savings.
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You must register for VAT if your business VAT taxable turnover is £85,000 or more (2017 threshold). If your turnover is below this threshold, your business will be taxed under the standard VAT scheme.
You can register for the scheme voluntarily if your turnover is below £83,000, unless you sell exempt goods/services. This will allow you to benefit from the flat rate scheme.
Once you have been registered for VAT, you will receive a VAT certificate within 14 days to confirm the following:
- Your VAT number
- Your company’s effective date of registration (this can be the date of incorporation/start date of a contract or the date you went over the threshold)
Flat rate scheme
Under the flat rate scheme, the amount of VAT charged to your clients is 20% but the amount of VAT paid to HMRC is at a lower fixed rate. This rate depends on your business type and is calculated based upon your total sales (including VAT) to HMRC.
If you are in your first year as a VAT-registered business, you can benefit by reducing the VAT flat rate by 1%. This rate lasts until the day before your registration anniversary.
Eligibility for flat rate scheme
You are eligible to join the flat rate scheme if your business turnover is no more than £150,000 a year (excluding VAT).
You will cease to be eligible to use the scheme if the total value of your income for the year ending is more than £230,000 (including VAT). However, if HMRC are satisfied the total value of your income in the next 12 months will not exceed £191,500 (including VAT), you may be eligible to remain in the scheme.
If you leave the scheme (by exceeding the threshold of £230,000 or having a turnover below £83,000), you are unable to re-join within 12 months of leaving.
This example assumes you are an IT consultant, where the VAT flat rate for the business is 14.5%. Please note, in the first year of registration, the VAT will be calculated at 13.5%.
Net invoice amount: £1,500
VAT 20%: £300
Gross invoice amount: £1,800
The liability is: £1,800 * 14.5% = £261
Flat rate income: £300 – £261 = £39
Advantages of being VAT registered and on the flat rate scheme include:
- the benefits of the flat rate income (extra profit);
- adding more credibility to the business (appear bigger and more established); and
- less admin work as compared to standard VAT scheme.
You are unable to recover input VAT on your purchases when using the flat rate scheme. The only exception is certain capital assets where the amount of the purchase is over £2,000 (including VAT). This value needs to be charged on a single purchase.
Examples of a single purchase include:
- Computer package (computer, printer, camera, scanner, speakers, etc.) bought as a package is one purchase of capital expenditure goods.
- Items of kitchen equipment (a pizza oven, a fridge and a dishwasher) bought for a restaurant. If all the items are from one supplier at one time, then they count as one purchase of capital expenditure goods. If they are from three different suppliers or at three different times then they will be three purchases and each must be £2,000 or more (including VAT to qualify for a reclaim of VAT).
VAT due date
The VAT liability needs to be paid on a quarterly basis on invoices paid in that period. The due date for filing and payment is always 1 month and 7 days after the quarter end date.
Whether you need assistance with completing your self assessment tax return or setting up your limited company, Cobia can help. To learn more about our accounting and taxation services for individuals and small businesses, contact us today.