Contractors registered for VAT can choose to use either the standard rate VAT or register for the VAT Flat Rate Scheme.
In this article, Gorilla Accounting’s team explain the features of both schemes, how they differ from each other, and what you need to take into account to choose the better option for your contracting business, alongside the advice given by your accountant.
The original aim of the VAT Flat Rate Scheme was to simplify the process of charging and reclaiming VAT for smaller businesses. It allows eligible businesses to calculate the VAT liability by applying a fixed rate percentage to their gross turnover.
To be eligible for the Flat Rate VAT Scheme, you should expect your VAT taxable turnover to not exceed £150,000 in the next 12 months. You must leave the scheme if your VAT inclusive turnover in the last 12 months was more than £230,000 or if you expect it to be in the next 12 months.
Some of the differences with the VAT Flat Rate Scheme compared to using standard rate VAT are as follows:
- You apply a fixed rate percentage, depending on the type of business, to the gross turnover to calculate the VAT liability.
- The difference between what you pay to HMRC in VAT and what you charge your customers is additional turnover for the business.
- You can’t reclaim VAT on your business costs, except for certain capital assets that cost £2,000 or more.
- You receive a 1% discount to the fixed rate percentage for the first year of VAT registration.
- Less than 2% of your VAT inclusive turnover.
- Less than £1,000 per annum (if your costs are higher than 2%).
The Flat Rate Scheme does have benefits but whether the scheme is best for you can depend on the industry that you work in, the level of company turnover, the amount you spend on goods used by the business and the amount of VAT that could be reclaimed using the standard rate scheme. It is worthwhile comparing what the business would pay using the Flat-Rate Scheme against using standard rate VAT.
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