3) VAT Flat Rate Scheme Advanatges & Disadvantages

What is the Flat Rate Scheme for VAT?

Using standard VAT accounting, the VAT you pay to HM Revenue & Customs (HMRC) or claim back from them is the difference between the VAT you charge your customers and the VAT you pay on your purchases.

Using the Flat Rate Scheme you pay VAT as a fixed percentage of your VAT inclusive turnover. The actual percentage you use depends on your type of business.

Benefits of using the Flat Rate Scheme
Using the Flat Rate Scheme can save you time and smooth your cash flow. It offers these benefits:

  • You don’t have to record the VAT that you charge on every sale and purchase, as you do with standard VAT accounting. This can mean you spending less time on the books, and more time on your business. You do need to show VAT separately on your invoices, just as you do for normal VAT accounting.
  • A first year discount. If you are in your first year of VAT registration you get a one per cent reduction in your flat rate percentage until the day before the first anniversary you became VAT registered.
  • Fewer rules to follow. You no longer have to work out what VAT on purchases you can and can’t reclaim.
  • Peace of mind. With less chance of mistakes, you have fewer worries about getting your VAT right.
  • Certainty. You always know what percentage of your takings you will have to pay to HMRC.

Potential disadvantages of using a Flat Rate Scheme
The flat rate percentages are calculated in a way that takes into account zero-rated and exempt sales. They also contain an allowance for the VAT you spend on your purchases. So the VAT Flat Rate Scheme might not be right for your business if:

  • you buy mostly standard-rated items, as you cannot generally reclaim any VAT on your purchases
  • you regularly receive a VAT repayment under standard VAT accounting
  • you make a lot of zero-rated or exempt sales

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