Is the Flat Rate Scheme right for your business?

It could be right for your business if you are already VAT registered and expect your turnover to be £150,000 or less (excluding VAT) in the next twelve month period. Once you join the scheme you can remain on it until your total business VAT inclusive income exceeds £230,000 a year.

It’s worth noting here that you won’t be able to join if:

• You’ve been in the scheme before and twelve months haven’t passed since then as you need to wait a full year before you can re-join
• You have been charged a penalty for evading VAT with the previous 12 months or guilty of any VAT offence
• You are currently (or have been in the previous 24 months) a member or potential member of a VAT group or registered for VAT as part of a larger business
• You use a second-hand margin scheme (a different way of accounting for VAT)
• Your business is closely associated with another business

Or, if you do not charge VAT on your invoices because maybe your clients are not UK based, the flat rate scheme might not be right for you.  You should speak to your accountant.

What are the benefits of the VAT Scheme?

Who doesn’t like it when things are made simpler?! With this scheme you don’t have to work out what VAT you claim on your purchases which makes your record-keeping much easier. Just make sure you keep receipts from your purchases.

And while it wasn’t designed for this, the scheme can actually earn your small business extra money as you’ll be charging at the standard rate, and paying HMRC at your flat rate which will be lower.

In the first year of using the flat rate scheme you’ll enjoy a further 1% discount, saving yourself even more.

Does the Flat Rate VAT Scheme benefit a Self-Employed individual or Limited Company Contractor?

As long as you are VAT registered, and meet the turnover criteria, you can join the Flat Rate Scheme. Usually your accountant can register the business on your behalf or you can complete a simple one page application form which you can email directly to HMRC at the appropriate address. Details can be found here: Joining the Flat Rate VAT Scheme.

However, 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 are classed as a limited cost trader if your expenditure on “relevant goods” is either less than 2% of your turnover, or less than £1,000 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.

In conclusion, how much you could benefit from the scheme will depend on the business you are in and the percentage you’ll need to pay.

As long as you meet the criteria, the chances are it will work in your favour – be that as a consultant, freelancer or contractor.

If you have further questions about VAT or the other schemes available, you can read our Comprehensive guide to VAT here, or why not book a FREE meeting with one of our fully qualified accountants?

They can talk through whether the Flat Rate VAT Scheme would be beneficial to you and your business, by how much, and how to sign up . . . we want our clients to be as successful and profitable as possible and choosing the Flat Rate VAT scheme could be a step towards achieving this.