The flat rate scheme of VAT registration is often preferred by small businesses. Registering under the flat rate scheme instead of registering under the standard rate can reduce the amount of vat that your business has to pay to the government. The standard rate of VAT is currently 20% (2013) whereas the flat rate scheme will range from 4% to 14.5%.
What is the flat rate scheme?
If your taxable businesses sales are estimated to be less than £150,000 in a 12 month period you can register with HMRC for the Flat Rate Scheme. The VAT Flat Rate Scheme may benefit many small businesses. The intention behind the scheme is to simplify preparing a VAT return and save small businesses time. Instead of accounting for all input and output VAT a set percentage rate is used to calculate VAT due from sales.
You are still required to add VAT to all customer invoices but you do not need to record every item of VAT on sales or purchases in your actual accounts. The amount of VAT due is simply calculated as a ‘flat rate’ percentage of your sales including the VAT you have added.
In addition to saving time, the flat rate scheme can have financial benefits. Some businesses have very few purchases to reclaim the VAT from, so using a set percentage rather than calculating actual VAT due can mean the VAT you return is actually less than the amount invoiced.
Example of additional profit using the flat rate scheme
The percentage of tax paid under the flat rate scheme will depend on the industry in which you operate. The following example demonstrates a business on a 12% flat rate (e.g. estate agents, investigation or security business, laundry business and many others).