Benefits of Being Limited: Flat Rate VAT Scheme

19th August 2016

By Walker Smith’s Junior Account Manager, Rachel Whittle.

When you make the decision to set up your own limited company, one benefit is that you can access what’s called the Flat Rate Vat Scheme. The scheme was introduced by HMRC in 2002 to encourage smaller businesses to register for VAT, even if they are below the threshold.

Legally, a company isn’t required to be VAT registered until their turnover hits £83,000 however, if your turnover is less than £150,000 per annum, you can benefit from the flat rate VAT scheme in more ways than one.

When you bill your client/agency inclusive of 20% VAT, rather than having to pay that full amount over to HMRC, you will pay it over at a lower percentage of around 14.5% maximum and you also get 1% discount in your first year.

As an example, if you charge your services at £300 per day, you would charge £360 inclusive of VAT.  On the Flat Rate VAT scheme, rather than paying over the £60 of VAT to HMRC you would pay over £52.20.  The result is that for each day you work, you make an extra £8.80 if you’re registered at 14.5% (or £44 per week) which can certainly build up over the year.  Dependant upon your job, you can pay back as low as 6.5% versus the standard 20%.

Annual VAT credit based on 14.5% flat rate on 48 weeks worked:

£150 day rate – £1368.00

£300 day rate – £2,736.00

£500 day rate – £4,560.00

The flat rate percentage you pay back to HMRC depends on your occupation; find a full list of flat rate percentages here.

The scheme is useful to smaller businesses as it simplifies VAT and takes away some of the admin element you might more commonly associate with VAT returns. Rather than claiming back the VAT on purchases, you just pay back one set rate to save you the hassle of collecting VAT receipts and having to reclaim it each quarter.

Whether you are registered for VAT on the flat rate scheme or not, Walker Smith’s Plus and Premium Contractor Accountancy packages include quarterly VAT returns to eliminate the administrative burden that comes with being VAT registered.

If you would like to see an illustration of your earnings  on the Flat Rate VAT scheme then speak to a member of our customer care team today on 0161 359 3235 for a FREE consultation. Alternatively, drop an email over to [email protected] and we’ll get straight back to you.