Smaller VAT-registered businesses can save a significant amount of work by joining the flat rate scheme. The scheme can be used by businesses that have taxable turnover of less than £150,000. Under the scheme VAT is calculated as a percentage of VAT-inclusive turnover. The percentage depends on the nature of the business (see
www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm).
A discount of 1% on the flat rate percentage is given to businesses in their first year of VAT registration, saving money.
Using the flat rate scheme removes the need to record separately the VAT charged on every sale and purchase, reducing the time spent doing the books. However, VAT must still be charged on sales within the scope of VAT and a VAT invoice issued on which VAT is shown separately.
Example:
Betty starts up in business as a bookkeeper. She registers for VAT and joins the flat rate scheme.
In the first quarter her VAT-inclusive turnover is £14,400. The appropriate flat rate percentage is 14.5% but as she is in her first year of registration she receives a discount of 1%. Therefore she pays VAT of £1,944 (£14,400 @ 13.5%) over to HMRC.
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