I'm registering for VAT - should I use the Flat Rate Scheme?
Whether you've reached the turnover threshold (currently £85,000 in any 12-month period) or want to register voluntarily for VAT, you've possibly heard of the Flat Rate Scheme and may be wondering whether it's the right scheme for your business.
If you'd like to be able to make more of an informed decision, here's some information to help you...
How is the Flat Rate Scheme different from normal VAT accounting schemes?
In a normal VAT scheme, you would calculate your tax bill by working out the VAT you've charged on your sales over the course of the accounting period (this is usually done each quarter), and then deduct the amount of VAT you've paid over to your suppliers for the same period.
In the Flat Rate Scheme (or FRS, which we'll call it from now on), you would pay across a set percentage of your sales instead, and wouldn't claim any VAT back on your purchases.
What percentage of VAT would I pay on FRS?
The percentage of VAT would depend on the nature of your business, and varies between 4% and 14.5%. There's a list of percentages for different trades here on the HMRC website.
As an example, if you provide beauty treatment services, you would pay 13% of your gross sales as VAT. Holistic therapy doesn't fall under any of the categories listed, and therefore if this is your line of work, you would be classified under "any other activity not listed elsewhere" and would pay 12%.
Each trade gets a reduction of 1% for the first year they use FRS.
One exception is if your goods purchases total less than either £1000 per year or 2% of your turnover for the same period. In this case, you're classed as a "limited cost business" and would pay 16.5% VAT on all your sales.
Can anyone use this scheme?
You're only eligible to join FRS if you expect your VAT taxable turnover (ie sales not including VAT) to be £150,000 or less in the next 12 months.
If you're already registered for VAT, and are currently using the Cash Accounting Scheme (this is where you pay VAT based on when your customers pay you, rather than when you invoice them), you can't use FRS at the same time.
Once your gross turnover (including VAT) goes above £230,000 in any 12-month period, you have to leave FRS.
How do I know whether I'd be better off on FRS or standard VAT scheme?
Take a quarter's worth of sales and purchases and work out which of the schemes would be more beneficial to you. First calculate it using the standard VAT method (see "How is the Flat Rate Scheme different from normal VAT accounting schemes?" above. Then calculate it again using your trade's percentage on FRS and work out which would benefit you most.
If you're using accounting software, such as QuickBooks Online, and start using FRS, your VAT reports will show you whether you would have been better off using standard VAT, so that you can make a decision on whether to leave the scheme.