Once your business achieves a turnover above a certain amount (£85,000, as of October 2021), you have to register for VAT. However, you do get a choice in the rate of VAT you pay.
It sounds good, doesn’t it? Well, there is a little more to it than that, of course. In order to qualify, you have to either register for VAT or already be registered, and you also have to have a turnover of less than £150,000. This means a lot of small businesses could qualify, which might make it worth finding out more about.
The idea is that instead of working out your VAT payments on every single invoice and sale, you pay a single fixed rate of VAT. Basically, you have to calculate your turnover, and the flat rate is paid as a percentage of that. As you can imagine, this is a lot easier to work out.
There are different flat rates available that depend on which business you are in. For example, at the time of writing, businesses offering agricultural services pay 11% VAT. Pet kennels services would pay 12%. You’re in luck if you hire or rent goods, as your VAT rate would be 9.5%. Meanwhile, a membership organisation pays 8% VAT as a fixed rate.
Since the current rate is 20%, you can see it depends on the industry you’re in as to the amount you’d pay if you joined this scheme. Moreover, you have to think about the difference between the two rates. You would still charge your clients 20% VAT in every case, so you get to keep the difference between the two. If you charge a client £1,000 in VAT on a sale and you pay 10% flat rate VAT, you get £500 and HMRC gets the other £500 in VAT.
However, you do need to get expert advice from your accountant or a tax adviser in order to work out if switching to this scheme would work for you. This would enable you to assess the amount of VAT you pay on things you buy too. Some businesses need to buy a lot of stock, and you wouldn’t be able to claim the VAT back on that stock if you switched to the flat rate scheme. On the other hand, if you don’t have much in the way of outgoings, you could benefit from doing things this way.