Flat Rate VAT Scheme Advantages

It is important to figure out if Flat Rate VAT Scheme actually is the best solution for your business specifics.

Are you applying for Flat Rate VAT Scheme to make a saving and VAT filing process cost effective?

In general you want to find out answers to following questions when considering the Scheme:

- how much VAT would I reclaim per certain period using one method or the other and what the difference is going to be

- how much time do I have to spend on calculating VAT reclaimable on each separate purchase and how much admin costs does it require in total

But here comes an interesting thing you should pay attention to. That is the Flat Rate percentage itself.

On HMRC website you will find Flat Rate percentage for your business category (e.g. it is 14.5% for Accountancy and Bookkeeping business category).

What is the Flat Rate percentage and how do you apply it?

- On the Flat Rate Scheme, you don't normally reclaim VAT on purchases.

- You work out your Flat Rate turnover for the period of your return and then apply your Flat Rate Scheme percentage.

- It is important to work out your Flat Rate turnover correctly. Your Flat Rate turnover is all the income you receive, including VAT.

If you charge your customers for example 20% VAT and your Flat Rate percentage is 14.5%, it does NOT mean your saving is the difference between these two percentages. You cannot compare these two percentages this way because:

- you are applying 20% to Net amount (excluding VAT) in order to calculate output VAT

- and you are applying Flat Rate percentage (in our example 14.5%) to Gross amount (all income including VAT) in order to calculate input VAT

Flat Rate percentage actually will be higher (therefore saving will be lower) if you convert it into a Net amount (excluding VAT) equivalent. When it comes to submitting VAT and filling in VAT return boxes, you might be surprised what your Flat Rate VAT saving actually is if you don't think through it properly.

There are other considerations to be taken into account e.g. you may be able to claim back the VAT on certain capital asset purchases with a VAT-inclusive price of £2,000 or more. See more details on HMRC website here.

What is your experience with Flat Rate VAT Scheme? We would love to hear of your own experiences so please do feel free to share with it in comments below.