The government introduced the Flat Rate VAT Scheme as an incentive to simplify taxes and reduce the costs of complying with VAT obligations.
In a nutshell, the Flat Rate Scheme enables you to charge VAT at the standard rate of 20% (accurate as of 2014) but pay it back to HMRC at a reduced rate. The rate that you pay VAT back to HMRC depends upon your profession, but you can find a straightforward breakdown on the HMRC website.
At Contractor Accountants Online, we can help people just like you to get to grips with the life of a contractor by managing all of your accountancy needs, including VAT returns. Call our expert accountants today on 020 7481 4743 to find out more about the Flat Rate Scheme and how we can help.
The Flat Rate Scheme enables you to pay back VAT to HMRC at a slightly reduced rate, which means that you can essentially profit from being VAT registered. As a result, many contractors and interims are opting to register for the scheme, but its best to have a clear understanding before deciding whether or not you should register.
It is also useful to know that in your first year of being registered on the scheme, you are able to reduce your flat rate by a further 1%. So let’s say for example that you are working as an IT Contractor, your flat rate should be 14.5%, but in your first year of registration, this would actually be 13.5%. As a result, you would only pay HMRC VAT at a rate of 13.5% and be able to charge your clients at a rate of 20%.
As an example, lets say you send your client an invoice for £4,000 plus VAT (20%) for your work over the past month; inclusive of VAT that would be a total of £4,800.
As you are in your first year of the scheme, you pat HMRC VAT at a rate of 13.5% of the gross invoice amount, so that means you’ll pay £648 in VAT for this transaction. Therefore you’ll have made a profit of £152 just from being registered on the Flat Rate Scheme.
Assuming that this is your only client and you bill them once a month for a year, your additional income from the scheme over 12 months would be £1,824.
As with anything, there are advantages and disadvantages to registering on the Flat Rate Scheme and we have summarised the key ones below.
The Flat Rate Scheme itself isn’t compulsory, but once your revenue exceeds £81,000 per annum you must register for VAT.
You are eligible to register for the Flat Rate Scheme if your business is generating revenue of £150,000 (excluding VAT) or less per annum.
Our team of fully qualified accountants are always on hand to help, so if you have any questions about the Flat Rate VAT Scheme or would like to find out more about our fixed-fee service, call us on 020 7481 4743.
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