If you are a contractor or freelancer, or own a small business, you may be liable for VAT. If your income reaches the threshold of £83,000 in any given tax year then you are required by law to register. The VAT Flat Rate Scheme for small businesses often works out a good option, as you get to keep some of the VAT you charge to your customers, and limit the paperwork involved with VAT return filing.
VAT in the UK
When your income reaches the VAT threshold of £83,000 (16/17), then you need to register for VAT. Some business owners opt for voluntary VAT registration before they reach the threshold, when conditions are favourable.
Currently, VAT is charged at 20%, so if you are a VAT registered business, you need to add 20% on top of your product or service.
It is also possible to claim back VAT on a selection of goods and services, where VAT applies.
Ultimately, you then deduct the VAT you claim from the VAT you charge, and subsequently pay across the balance to HMRC on a quarterly basis.
Register for Flat Rate VAT
Some businesses are eligible to register for the Flat Rate VAT, which means that you can pay across a lower rate of VAT to HMRC, according to your trade.
Essentially, this means that you get to keep some of the VAT you charge your customers, adding to your annual income.
With the VAT Flat Rate scheme there is no facility to claim back VAT on expenses, apart from specific capital items with a value over £2,000. Therefore, if you buy lots of stock in your business, the Flat Rate VAT scheme can be a disadvantage as you miss out on claiming back VAT on your costs.
Otherwise, it usually works out more effective to be on a flat rate, particularly for service-based businesses, contractors and freelancers.
To register for Flat Rate VAT your income (turnover) must be under £150,000 and your business needs to apply to HMRC.
Calculating Flat Rate VAT
If your income is under £150,000 then work with an accountant to ensure registering for Flat Rate VAT is the best choice for your business. There are exceptions for registration so you will need to make sure you meet all criteria before applying.
VAT returns still need to be submitted quarterly so it becomes your responsibility to ensure you are correctly calculating Flat Rate VAT.
Here is an example:
If you raise an invoice for a customer for £1,000, as a VAT registered business you are required to add on 20%, so £200, making the total invoice, £1,200.
If you are, an IT contractor, your Flat Rate percentage is 14.5%, meaning that £1,200 X 14.5% is £174. The £174 is what you pay across to HMRC, meaning you get to keep £26 of the VAT charged to your customer (£200 – £174)
The table below shows some common trades for small business owners, contractors and freelancers, along with the current Flat Rate VAT percentages:
For a full list, visit HMRC.
In the first year of registration, each of these Flat Rate VAT rates are discounted by a further 1%, adding to the incentive for small businesses to use this scheme.
Using Online Accounting Software for Flat Rate VAT
Using Online Accounting Software is the simplest way to calculate your Flat Rate VAT.
It is easy to set up and update the rate if the flat rate for your industry happens to change.
The system effectively completes the VAT return for you, based on the information collected through the month; i.e. your customer invoices. All it requires from you then is a check to ensure everything is in line with your expectations and the final submission.