Yet again, excuse the blog silence of late. The office is bustling with tax returns and new clients so time for blog posting has been minimal.
Our most frequently asked question of late is an interesting one; "Should I be VAT registered?". It's a bit of a technical answer but bear with me.
If your income (turnover) for a 12 month period is over £82,000, you have no choice and should be registered for VAT. If your income is under £82,000, there is no necessity to become VAT registered.
However, the exciting news is that there is something called the Flat Rate Scheme that can make it beneifical to be VAT registered as you can make a profit from doing so.
What is the flat rate scheme?
It is a scheme that is aimed to simplify your VAT returns.
Being on the flat rate scheme means that you do not reclaim VAT on your purchases (except on capital assets worth more than £2,000).
It means that you simply calculate the VAT due to HMRC in a different and easier way.
How do I calculate the VAT
Your VAT is calculated in the normal way by adding 20% to your invoice to your client.
So an invoice of £1,000 becomes £1,200 including VAT.
You do not account for VAT on any of your purchases unless you have purchased a capital item over £2,000.
Instead the amount you pay over to HMRC is calculated by reference to the Flat Rate percentage as follows:
Gross sales (i.e. inclusive of VAT) x Flat Rate percentage applied for your type of business.
Let's look at an example.
Alex works in live theatre and his income is £100,000 per year.
As Alex doesn't have an agent, his only costs are his salary, the train to work (which has no vat on it) and his accountant at £480 per year plus vat.
If Alex was NOT on the flat rate scheme his VAT calculation would be as follows:
Output VAT due to HMRC = £100,000 x 20% = £20,000
Input VAT due to be reclaimed from HMRC = £480 x 20% = £96
Total VAT payable to HMRC = £19,904
Flat Rate Scheme
As Alex is on the Flat Rate Scheme, his percentage for his type of business 'Entertainment' would be 12.5%.
His VAT payable to HMRC would be as follows:
£100,000 plus VAT = £120,000 x 12.5% = VAT due to HMRC of £15,000
Alex is therefore better off by £4,904 by being on the Flat Rate Scheme.
Enjoy your week.
PS. If you haven't got your tax information to us yet, get a move on :)