VAT is the most complicated tax that a business has to deal with on a daily basis. Some businesses may be able to simplify their VAT affairs by joining the Flat Rate Scheme.
But is this the right scheme for your business?
Your business can join the flat rate scheme if in the next year your estimated VAT taxable turnover without adding VAT is £150,000 or less.
It is a scheme that should simplify your VAT accounting.Being in the flat rate scheme means that you do not reclaim VAT on your purchases (except on capital assets worth more than £2,000).It means that you calculate the VAT due to HMRC in a different way.
You calculate the VAT due to HMRC by reference to a flat rate percentage.You choose the percentage that best corresponds to your business sector from the list provided by HMRC.You only choose one percentage.
Your VAT is calculated in the normal way at 20% on your sales.So a sale of £1,000 becomes £1,200 including VAT.You do not have to account for your VAT on all your purchases.Instead the amount you pay over to HMRC is calculated by reference to the flat rate percentage as follows:
Gross sales (i.e. inclusive of VAT) x Flat Rate percentage applied for your industry.
Example:
John is an IT Contractor. His vatable turnover is £100,000 / year.His only costs are his salary, the train to work (which has no vat on it), sundry items and his accountant at £480 / year plus vat.
Standard VAT
If he was NOT on the vat flat rate scheme his vat would be as follows:
Output tax due to HMRC £100,000 x 20% = £20,000Input due reclaimed from HMRC £480 x 20% = £96 VAT due to HMRC = £19,904
Flat Rate Scheme
If he was on the flat rate scheme his percentage for his industry would be 14.5% So he would pay HMRC VAT of ….£100,000 plus vat = £120,000 x 14.5% = VAT due to HMRC £17,400 John would be better off by £2,504 if he was on the flat rate scheme.
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