The Flat rate VAT scheme was provided to try to help simplify tax for small business owners.

Basically it means that whilst you charge VAT to your customers at 20% you actually pay the money over to HM Revenue and customs at a lower rate. (The actual rate is determined based on your trade or profession, see HMRC Flat rate table). The rate is based on the gross amount and the great news is that in the first year od VAT registration the rate is discounted by 1%.

The scheme does however mean that you cannot claim back VAT on any purchased goods or services for the business except for a capital or assets (if on same receipt) that total more than £2000.

Our friends over at FreeAgent have a fantastic tool to help work out if you are better of on the flat rate scheme.

FreeAgent FRS tool

If used correctly this can actually generate an additional income.

Example:

A Freelance web designer who invoices £50,000 per year.

Invoiced work: £50,000

VAT charged: £10,000

Total: £60,000

Flat Rate percentage: 13.5% (1% discount first year)

Total VAT to pay: £8,100 (£60,000 x 13.5%)

Total income: £60,000 less £8,100 leaving £51,900.

That's an extra income of £1,900.

Registration limits:

Estimated annual turnover, excluding VAT, of up to £150,000 (once o the scheme you must exit the scheme at £230,000)

Advantages:

The ability to increase your earning through VAT registration. Reduced paperwork. Easier to plan cashflow with VAT as its based on Turnover.

Disadvantages:

Not being able to recover VAT on purchases.

This scheme works very well for a lot of contractors, or freelance workers. It might work very well for small design agencies or other consultants. Remember if you are working mainly with VAT registered customers you might be better off registering for VAT , even if you havent exceeded the required limit.

You're always welcome to get in touch to ask any questions.

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