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Flat Rate VAT Scheme

The flat rate VAT scheme is a simplified method of calculating VAT as a percentage of your taxable turnover. This means that you pay HMRC a fixed rate of VAT dependent upon what industry/profession you work in. To be eligible your taxable turnover must be less than £150,000 per annum.

Accounting for Flat Rate VAT

Let’s illustrate how you can account for the flat rate VAT scheme with an example:

Contractor X is an advertising executive who supplied 20 hours of service to Client Y in March 2016. The cost of their service amounted to:

Flat rate VAT explained

The contractor has collected £200 but is only required to pay £120. The difference is called a ‘flat rate scheme surplus’ and forms part of other income in the profit & loss statement of the contractor's company.

How to Register for the Flat Rate Scheme

Your company must be VAT registered before you can register for the flat rate VAT scheme. To register for the scheme you need to complete and send an application form to HMRC.

Once the form has been submitted HMRC normally sends a notification of acceptance onto the flat rate scheme and confirmation of the rate your company has to apply. In the first year of being VAT registered the flat rate VAT rate is discounted by 1%.

It can take anywhere between 1 - 4 weeks to get registered and all registrations are retrospectively applied to the effective VAT registration date (within a reasonable time frame).

So for example, if you send off an application on the 4th March and applied for an effective registration date of the 1st February and HMRC receives and processes the application on the 4th April, they will accept your company onto the flat rate scheme at your selected effective date.

At Aidhan Accountancy we deal with the application on your behalf as part of our package deals for contractors and freelancers.

Advantages and Disadvantages of the Flat Rate Scheme

Advantages

  • You don't have to record the VAT that you charge on every sale and purchase as you do with standard VAT accounting. This means spending less time on the books and more time on your business. You do need to show VAT separately on your invoices, just as you would for standard VAT accounting.
  • If you are in your first year of VAT registration you get a 1% reduction on your flat rate VAT percentage.
  • Fewer rules to follow. You no longer have to work out what VAT on purchases you can and cannot reclaim.

Disadvantages

  • You mostly buy standard rated items. If you incur high levels of VAT on purchases and expenses, the flat rate VAT scheme may not be appropriate for your business.
  • You regularly receive a VAT repayment under standard VAT accounting.

How can Aidhan Accountancy Help?

You can watch our free online webinars providing lots of useful advice and guidance or if you want to get in touch you can call us on 0203 368 3173.

Disclaimer
This publication is intended for general guidance and does not replace the need for professional advice. We take no responsibility for any consequences of actions taken as a result of this guide.

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