Many small businesses have no idea that the 'Flat Rate scheme' exists for VAT. This scheme is aimed at the smaller business; it takes away a lot of VAT processing and you could even make a profit out of VAT too!

The scheme works by calculating a set percentage of your sales invoices including the VAT (Gross). The % is determined by HMRC as per this list;

http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm#5

Once you have the percentage, all that you need to do is to apply that % to your gross sales invoice, and that is it your VAT for the quarter is calculated, with no need for claiming the input VAT on purchases.

We do however recommend that you record the input VAT so that you can monitor if you are on the best scheme for you. As your business grows we often find that there are more expenses with VAT creeping in and in this case it would be wise to review using the flat rate scheme.

If you are a sole trader and registered for VAT under the flat rate scheme, be aware that other income you have, for example property rental income could also be captured under the flat rate scheme. Always ask for advice.

An example of the Flat Rate scheme

A hairdresser registers for VAT and their % is 13%. Most costs relate to product and the majority is the hairdressers time. If they turnover £80,000 and apply VAT to this at 20% the income is £96,000 with £16,000 VAT due to HMRC less a small amount of VAT on product.  This £16,000 is due to HMRC.

Under the Flat Rate scheme you apply the 13% to £96,000 and pay over the £12,480 due giving a potential saving of £3,520 in VAT.

In the first year of VAT registration you can reduce the % by 1% giving a further saving of £960 in the example above.

You can not claim VAT back on your purchases except for larger capital purchases and we recommend that if you need to buy equipment, especially in the example of the hairdresser (blow dryers, chairs, mirrors, computer etc) that you operate VAT as a standard trader and then switch to the Flat Rate scheme, this will allow you to claim on all those "up front"costs.

Sage One Accounts & Extra operate the Flat Rate scheme for you and tells you if you are making a profit from VAT or not.

For more information about our Online Accountancy services, please click here

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