Is the flat rate scheme right for your business?

Ever thought of registering for VAT even though your business hasn’t reached the VAT threshold? Sounds stupid? It may not be as much of a crazy idea as you think, with the flat rate scheme.

As tax advisers, we come across many clients who feel that they should not register for VAT, as they are under the VAT threshold (currently £83,000). Whilst this is perfectly understandable for many, if you run a small business* that has low overheads, you may want to consider the VAT flat rate scheme (FRS).

Why register for VAT if you don’t need to?

There are advantages to being VAT registered:

–  It can increase your profitability, as long as the majority of your customers are VAT registered, as they simply claim back the VAT you charge them from HMRC

–  It can give customers and the outside world the perception that you are well established and trading above the VAT registration threshold

–  You can claim back VAT on capital expenditure and services you incurred before you became VAT registered.

The flat rate scheme (FRS)

The flat rate scheme is an alternative way for small businesses* to work out how much VAT to pay each quarter.

Flat rate is a fixed rate percentage of your VAT inclusive turnover. The rate is fixed by HMRC and is determined by your type of business or profession. Rates differ widely depending on your sector.

It’s designed to save small businesses time as it simplifies your record keeping of sales and purchases. It allows you to apply the fixed rate to your gross turnover to work out the VAT due.

Benefits of the flat rate scheme

–  It’s simpler, involves less work and takes less time than the standard VAT scheme.  Rather than working out VAT on each purchase and sale, you simply use a flat rate based on your gross sales figure

–  It will increase the profitability of your business, providing the majority of your customers are VAT registered

–  As a new user signing up to the flat rate scheme, you’ll get a 1% discount on your flat rate percentage during your first year of VAT registration

–  As the calculations are easy to perform, you can effectively budget for the VAT due, so you’ll always know how much to pay to HMRC

–  In addition, you can still claim back input VAT incurred on large capital purchases (over £2,000).

Could be for you…

If you’re a small business* with low overheads that are standard-rated for VAT, such as architects, IT consultants or web designers.

Get professional advice

Contact us or speak to your tax adviser or accountant about the best approach for your business.

The flat rate scheme isn’t for everyone and mistakes can be costly, but if it suits your business, then it can prove a very sensible financial decision.

For more on the flat rate scheme, look at HMRC’s website.

To read more about tax, check out our blogs.

* Small business classed as having a turnover in the forthcoming year of £150,000 (excluding VAT) or less.