There's plenty of financial doom mongering going on at the moment, so who wouldn't like to find a way to muster a larger profit margin? One way to successfully do this is to review how you calculate your VAT.
Tax issues can be daunting due to their complexity, but with a little research and some sound advice you could save thousands of pounds. In the current climate, there's no doubt that would be very welcome.
What is Flat Rate VAT?
The Flat Rate Scheme for VAT is pretty straightforward. It was introduced back in April 2002, with the aim of providing a simplified way of calculating VAT for companies with an annual turnover of less than £150,000 (excluding VAT).
In practice, a company under the scheme no longer has to keep internal accounts on all purchase and supplies to submit a VAT return. Instead, the business works out its net liability by applying an agreed (flat rate) percentage to its turnover. This flat rate percentage differs from sector to sector and can range from 5% to 14.5%. With this in mind, you need to do a little research to calculate if it would be profitable for you. HMRC has come up with a handy calculator that could help you decide. Click here [1] to view its Ready Reckoner.
Here's a quick overview of how Flat Rate VAT might be calculated if the applicable flat rate for your industry was 8%:
* Sales: £1,175 (includes £175 VAT)
* Purchases: £470 (includes £70 VAT)
Normal VAT calculation:
VAT on sales = £175
VAT on purchases = £70
VAT due to HMRC = £105
Flat rate VAT calculation:
Total sales = £1,175
Flat rate = 8%
VAT due to HMRC = £94
In this example, you can see that the VAT liability under the Flat Rate Scheme is £11 less than under the normal VAT rules, thus increasing the profit margin of the business.
A Further Example
As mentioned, whether your company will benefit will depend on your industry and size. For example, consider a plumbing company working on large construction sites.
In a typical year it may charge its clients £141,000 (including £21,000 VAT) and pay suppliers £47,000 (including £7,000 VAT). It would therefore pay the net £14,000 VAT to the taxman (£21,000 minus £7,000). This leaves a profit of £80,000.
If it were to register under the Flat Rate Scheme, things would be a little different. Under this scheme VAT would be fixed at a rate of 8.5% of its total turnover, so it would only pay £11,985 to the taxman. This would leave it with a larger slice of profit - £82,015.
It's Not Right for Everyone
This scheme won't be for you if you can't bill your clients VAT (for example, if they're outside the UK).
In order to register for the scheme your annual turnover needs to be less than £150,000 (excluding VAT). It's worth noting here, that even if you aren't currently registered for VAT (if your income is less than £67,000) it may well be worth you doing so. Yes, this would involve a bit more paperwork, but the financial rewards could be worth the extra effort.
If you aren't currently registered for VAT and you sell to the general public, billing an additional 17.5% will reduce demand for your services. In this case you will probably not benefit from the Flat Rate Scheme. However, if your clients are businesses they will probably be registered for VAT in which case they can reclaim any VAT they pay you.
Accounting Software
Although the Flat Rate Scheme for VAT is designed to simplify your tax returns, it can be a major headache if your accounting software does not support this scheme. Ideally the software should be able to show you how much money you are making (or losing) from the scheme. If you find you are in fact losing money then you can opt out of the scheme at any time.
Get Expert Advice
Having run my own company for a number of years, I know how getting the right information on tax can be a minefield. If you have a good bookkeeper or accountant then pick their brains for these invaluable tips. Just asking a few questions could save your business thousands of pounds a year.
You can get more information on the Flat Rate Scheme from VAT Notice 733 or by calling the HMRC National Advice Service on: 0845 010 9000
Mark McLaren is managing director of Solar Accounts. For more information visit www.solaraccounts.co.uk [2]