The current compulsory VAT registration threshold for businesses is a turnover of £81,000 in any 12 month period. Many small businesses operating below that limit are very pleased that they don’t have to bother with all the administration around registering, adding vat to their invoices and having to file vat returns every 3 months. However in practice I find it is often worth voluntarily registering and opting for what’s called the flat rate scheme as it results in the business making a worthwhile profit that outweighs the administration time.
Before explaining how the flat rate scheme works I should first make the point that it only makes sense to consider voluntarily registering for vat if all or the majority of your clients are vat registered themselves. If they are, they will be able to reclaim the vat themselves so it won’t make any difference to them. However if they aren’t (or are on the flat rate themselves) they won’t which means you’ve just added 20% to the cost of your service or product !
The flat rate vat scheme was introduced by HMRC to simplify vat reporting for small businesses, (the maximum turnover to be eligible to join is £150,000) because they found that so many where making mistakes using the standard scheme, which wasn’t surprising considering how incredibly complicated VAT is in this country. The main problems were due to confusion over what expenses had vat on them that could be claimed back and which didn’t. The flat rate scheme solved this by not requiring any calculation of vat on expenses, instead all that is required is a calculation based on two figures, the total sales for the three month period and the relevant percentage of the sector the business falls into – so for example computer and IT related services have a sector percentage of 14.5 %. ( a full list of all sector rates are available here )
The calculation then becomes one of multiplying one by the other, so if sales for the 3 months of say a web design business were £10,000 plus vat of £2,000 giving a total of £12,000 the vat payable would be £12,000 x 0.145 = £1,740
Compare this with the vat charged of £2,000 gives a net profit of £260 (£2,000 – £1,740 ) for the 3 months or over £1,000 for the year.
Even better, in the first year of VAT registration if you are on the flat rate you get a 1% discount so the figures would look like this – £12,000 x 0.0135 = £1,620 giving a net profit of £380 for the 3 months or £1,520 for the year.
An added benefit to being vat registered is that it does add a degree of additional credibility to your business. Obviously the downside is having to file vat returns every 3 months but if you’re using cloud accounting software such as Xero, Freeagent or Kashflow it will be able to do this for you, all you will need to do is hit a couple of buttons so it should take you a couple of minutes.
Further information on the flat rate scheme and how to apply can be accessed here or alternatively drop me a line and I’ll be happy to discuss with you whether it is right for your business.