Should I have the Standard Rate VAT or Flat Rate VAT scheme?
What is V.A.T.?
VAT stands for Value Added Tax. This is a tax on most goods and services at every stage of production and distribution.
A business pays VAT on all purchases it makes (INPUT TAX) and then charges VAT on all the sales it makes (OUTPUT TAX). If the business receives more output tax than input tax during a VAT period, the difference is paid to HMRC. Likewise HMRC refunds the difference if input is higher than output.
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Standard Rate VAT
The standard rate of VAT is 17.5%, although from 1st December 2008 until 31st December 2009 this rate has been lowered to 15% following the Pre-Budget Report.
Contractors receive a VAT return every quarter; calculations and payment must be returned to HMRC no later than one month after the end of your VAT quarter. A good contractor accountant, particularly an online accountant, will do the VAT calculations for you, or you can submit your VAT calculations and payment online.
Flat Rate VAT Scheme
The Flat Rate VAT Scheme is designed to simplify bookkeeping and save time for small businesses (those with a VAT taxable turnover of less than £150,000).
The Flat Rate VAT Scheme means that you do not have to calculate VAT on each and every transaction, but instead pay a flat rate percentage of your turnover as VAT. The percentage of VAT is lower as it takes into account that you are not reclaiming VAT on your purchases.
Flat Rate VAT provides the following advantages of:
- Easier record-keeping - there is no need to separate out the gross, VAT and net in your accounts
- Saving you time - less bookkeeping, which means you have more time to run your business
- Having less rules to follow - no issues with VAT about what you can or cannot reclaim on purchases
- Certainty - you will always know how much of your takings you need to pay
- 1% Reduction Rate - if the business is in the first year of VAT registration
- You can continue to invoice clients at the normal VAT rate (currently 15%)
- You can voluntarily leave the flat rate VAT scheme at any time
Flat Rate VAT Scheme is good for: Skills based contractors, freelancers and independent consultants.
Flat Rate VAT Scheme is bad for: Materials based companies who buy a lot of goods and services from VAT-registered businesses, as you could end up paying more VAT.
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How to set up a Limited Company
How to open a Limited Company bank account
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Guide to online software
