In this blog we’ll be talking about the pro & cons of the flat rate tax VAT schemes. It could be really useful if you’re thinking about setting up your own business or if you’re thinking about becoming VAT registered.
Flat rate tax is where you have a fixed rate of tax throughout the year. This means that no matter what your VAT input and VAT output are, your tax bill at the end of the year will be the same. This scheme is normally put in place with small businesses who have a small amount of overheads or a lot of hospitality businesses with a lot of stock that doesn’t have any VAT when it’s purchased.
Who Qualifies for flat rate VAT?
There are some rules for qualifying for a flat rate VAT scheme. First off, you must be a VAT registered business to apply for a flat rate scheme. Your business also must have a turnover less than £150,000 over twelve consecutive months. But the £150,000 is exclusive of VAT. Also, if your business is closely related to another business. This is usually because the combined turnover of the two businesses are normally higher that the £150,000 turnover.
What are the pros of a flat rate VAT scheme?
When you first register for flat rate VAT, HMRC will give you a 1% discount on your first year. Although 1% doesn’t seen like a lot, every small amount makes a different to your business. If your VAT purchases are low, it means you may be making additional profit at the end of your year. Flat rate VAT is also easier to work out the VAT at the end of the period. Another important thing to remember is, if you have any high purchases before you switched to a flat rate scheme, like a car or a new piece of equipment, you can still claim the VAT back, but this is limited.
What are the cons of a flat rate VAT scheme?
One negative of a flat rate VAT scheme is that the rate of VAT will stay the same on sales that have no VAT on them. This could mean that at the end of the year, you may have paid out a lot of VAT on purchases but haven’t had as much VAT output, you would normally get a rebate. But with the flat rate scheme it stays the same.
I really hope this has been useful for anyone thinking about switching to a flat rate scheme. If you do have any questions or would like any other additional information then please contact the team. We would love to hear from you.