The low-down: how the Flat Rate VAT Scheme can make you money
“We all want to make a spot of easy money in these hard times, don’t we?” wrote the PG Wodehouse character Monty Bodkin in his editorial to Tiny Tots’ magazine. “Well, here’s the low-down, straight from the horse’s mouth.”
Monty goes on to tell his young readership how to scoop the stakes by getting hold of some mug and betting him that a quart whisky bottle holds a quart of whisky.
If that’s a scheme that appeals to you, grab yourself a copy of Weekend Wodehouse. But if you’d like the lowdown on how to get some free money out of the taxman, read on.
As you can imagine, the taxman is as keen as mustard to get you into the VAT net. If you are bringing in less than £83,000, you’re not obliged to register – but the taxman is prepared to offer you a sweetener.
It’s called the VAT Flat Rate Scheme.
If you take part in this (you can join it as long as your turnover is less than £150,000 and can stay in it until it reaches £230,000), you charge your clients or customers 20% VAT as normal.
Where it gets good is in the fact you don’t have to hand over that same 20% to the taxman. Instead you hand over a smaller amount, which depends on the type of business you operate.
If you’re a consultant (who isn’t a management consultant), the even better news is that the courts have ruled you now only have to hand over 12% in VAT, not 14% as before.
But before you make the classic mistake of thinking you get 8% of that 20% to hide under the mattress, there’s a subtle difference with the VAT Flat Rate Scheme. While you charge clients or customers 20% VAT on your goods or services, the Flat Rate percentage is calculated on the total invoice including VAT.
Here’s an example of what you’ll charge and pay if you’re on the 12% Flat Rate Scheme.
- Cost of service £100 – VAT payable to you £20 – Total invoice £120
- 12% of total invoice of £120 – £14.40
That means you pay the taxman £14.40, giving you £5.60 of the £20 to hang on to for your own purposes. Things get even better in the first year of registration too – you get to keep an extra percentage point, so you would give the VAT-man only 11% of the total invoice.
That gives you £6.80 out of that £20. It doesn’t take many invoices of that size to provide you with funds for a new quart bottle of whisky (which, incidentally, can hold more than a quart). Though do remember that the profit you make is subject to income tax if you are self employed or corporation tax if you have a company.
So, if your turnover is going up and VAT registration looms, or if you run a services business from home, the chances are you will make money from the Flat Rate Scheme – even after tax.
In summary, if you’d like to know whether you could get some free money from the Flat Rate Scheme, or you’d like to know about how charging VAT works, which category of the Flat Rate Scheme to use or which accounting system to use, talk to THP today. We could even work out how much extra money it could generate for you – we are Totally Helpful Professionals after all!