The Flat Rate VAT scheme is a commonly used option for contractors. This scheme is specifically aimed at those companies providing a service, as they generally don’t have large amounts of VAT to reclaim for business purchases.
If your business is VAT-registered, then the VAT you must pay to, or may reclaim from, HMRC is calculated as the difference between the VAT you charge your customers and the VAT your business pays on purchases. This is also referred to as the standard VAT scheme.
The Flat Rate VAT scheme will mean you pay a fixed rate of VAT to HMRC. Any extra income arising from the difference between VAT charged to your customers and paid by your company may be retained.
It’s worth noting that with Flat Rate VAT, you can’t reclaim the VAT on your purchases – except for certain capital assets over £2,000.
Who is eligible?
You can join the Flat Rate VAT scheme if:
- You’re a VAT-registered business
- You expect your VAT-taxable turnover to be £150,000 or less (ex VAT) in the next 12 months
Advantages of Flat Rate VAT
This scheme could allow you to generate extra profit, if you end up paying less VAT than you charge customers. It’s also likely that you will have substantially less paperwork to deal with as you will pay a set amount of VAT.
You’ll also receive an additional 1% reduction in your first VAT-registered year.
Please refer to the table below as an example of earning some additional revenue for your business by using the Flat Rate VAT scheme, or see a few FAQ here:
For an invoice amount of £1,000, under the Flat Rate VAT scheme a contractor can earn an additional £32, as opposed to the standard VAT scheme. No VAT is being claimed for business expenses in this example as for most contractors there will be very little, if anything to claim even if using standard VAT.
Flat Rate VAT disadvantages
The only real disadvantage is if you buy a substantial amount of stock or business items. As a general rule, you won’t be able to claim back VAT on these items. This may cause your business to lose money when compared to standard VAT practices.