The flat rate VAT scheme is an incentive set up by HMRC to help simplify VAT accounting for certain organisations. Essentially, you charge VAT on your invoices at the current rate of 20% but only repay HM Revenue and Customs at an agreed lower rate – rates vary depending on your profession/trade, and there is currently a 1% discount in your first year of VAT registration. As an example, an IT contractor will pay VAT at the rate in the first year of just 13.5% of the gross amount and 14.5% in subsequent years.
To be eligible, your expected first year ex VAT turnover must not exceed £150k, and once you join the scheme you can remain in it until your total business income is more than £230k. Generally you cannot reclaim any of the VAT that you pay on purchases, although you may be able to claim back the VAT on capital assets worth more than £2k. Visit the VAT section of Evans Entwistle’s website for more.