A lot of small business owners put off getting VAT registered because they find it daunting. But VAT doesn’t have to be taxing. The Flat Rate VAT scheme makes it easy, and it can help boost your post-tax profits too.

The Flat Rate VAT incentive is a popular choice for independent contractors, sole traders and directors of small limited companies. Read on to find out if it is right for you as well.   

How Flat Rate VAT works

The Flat Rate VAT scheme is a government incentive designed to simplify taxation and get more small businesses growing.

Once HM Revenue and Customs (HMRC) have approved your request to join the scheme, you start charging clients VAT at the current standard rate of 20%.

HMRC then claim VAT back from you at a lower fixed rate (anywhere between 4 and 14.5 percent) allowing you to keep the difference.

The rate at which you pay VAT to HMRC varies by industry (check with an Umbrella.co.uk adviser what your rate will be), but generally limited companies will enjoy a few extra percentage points of profit thanks to this arrangement.

As an extra incentive to join, you will get a 1% discount from the HMRC in your first year. This means that if you would normally pay VAT at a fixed rate of 14.5%, you’d only pay 13.5% in the first year.

Example: a labour-only construction company

A limited company providing labour-only construction services will pay VAT at 14.5% on the Flat Rate VAT scheme. If a contract comes to £10,000 then they can charge VAT on top of this at 20% - that’s an extra £2,000.

When it comes to paying HMRC, the company will pay back VAT at a fixed rate of 13.5% (with a first year discount) on the gross £12,000 - equalling £1,620.

Subtracting the two VAT totals gives you an extra post-tax profit of £390, enough for decent set of golf clubs.

Keeping it simple

Administering the Flat Rate VAT scheme is straightforward.  All you have to do is fill in a single-page return, which Umbrella.co.uk can manage on your behalf. These payments are made quarterly to HMRC.

Is Flat Rate VAT suitable for me?

Does the Flat Rate VAT scheme appeal to you? There are a number of important considerations before you sign up.

First of all, there is an upper threshold for joining. To get onto the scheme your pre-VAT turnover must be less than £150,000. If you estimate that your turnover will exceed this then you shouldn’t join.

After you’ve joined, your VAT inclusive revenue can’t exceed £230,000 or you will have to come off the scheme.

Once you’ve joined you also won’t be able to reclaim the VAT on business purchases – except for certain capital asset purchases over £2,000.

Neil Armitage, Operations Director at Umbrella.co.uk, commented "The Flat Rate Scheme is very popular with our clients with over 99% of them enjoying the benefits of the scheme. We always check to see which is the best fit for the client and it's nearly always the Flat Rate Scheme."

For more information on the Flat Rate VAT scheme, or to find out if it is suitable for your business, get in touch with one of our customer advisers today. Call: 0800 121 6513.