Should I Be VAT Registered

This has definitely taken over as the most frequently asked question lately; “Should I be VAT registered?” If your income is under £82,000 in a 12 month period the answer is normally no. However, with the VAT Flat Rate Scheme, it could be a big YES.

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.

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.


Standard 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.

Notes 

  • ‘Profit’ made on the Flat Rate Scheme (£4,904) is treated as such and is therefore subject to tax and National Insurance (if applicable).
  • You have to compare the Flat Rate Scheme to being on Standard rate and claiming back VAT on your purchases. If you have a lot of VATable purchases then it may not be worth registering for the flat rate scheme.
  • Flat rates vary per type of business so this calculation should be used as a guide only and reworked for the rate specific to your type of business.
  • In your first year of being VAT registered and operating the Flat Rate Scheme you can reduce the Flat Rate percentage by a further 1%.
  • Your VAT taxable turnover is the total of everything that you sell during the year, including business assets.

If you do not need to be VAT registered but are considering voluntarily registering and using the Flat Rate Scheme, the biggest thing to bear in mind is if your customers are VAT registered and able to claim the additional VAT you would charge them back.  If they are and the savings to you are substanital enough then it is definitely worth registering.

However, if the majority of your clients are not VAT registered and you are not able to charge them the extra 20%, it would not be worth you registering. Your customers will not want to pay you an extra 20% on top of your income, if they are not able to claim it back from HMRC.

You can read more about the Flat Rate Scheme here.  The GOV.UK site also gives a further overview and details on eligibility.

You can find out more about the specific rates for your type of business here.

Hopefully the above has given you a bit of information with regards to VAT registering and potentially joining the Flat Rate Scheme. Each individuals circumstances are different and you should always contact us to discuss your personal circumstances in further detail – there is no charge for doing this.

If anyone has any questions with regards to VAT or anything else, please do not hesitate to get in touch.  You can call, email, tweet or even use the live chat function on our website.

Enjoy your week.

Alex

PS. If you haven’t got your tax information to us yet, get a move on 🙂

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