Understanding the differences between Flat Rate and Standard Rate VAT is important when you are considering going VAT registered, or if you are about to reach the VAT threshold where registration is mandatory. There’s no formula to say one is better than the other, but understanding how the Standard Rate VAT and the VAT Flat Rate Schemes work can help you weigh up which is right for your business, if you have the choice between the two.
Differences between Flat Rate and Standard Rate VAT
With the Standard Rate VAT, the amount of VAT you pay to HMRC is the difference between the VAT you charge customers, and the VAT you pay on qualifying purchases.
With the VAT Flat Rate Scheme, instead of returning the VAT to HMRC that you charge customers, you pay a set rate to HMRC which is a percentage of your turnover. The rate you pay varies depending on the nature of your business.
The simpler VAT Flat Rate Scheme was introduced to help ease the administrative pressure that smaller businesses face in preparing VAT Returns.
Which businesses are eligible for the VAT Flat Rate Scheme?
To be eligible to join the VAT Flat Rate Scheme, your turnover must be £150,000 or less (excluding VAT) in the next 12 months. You must apply to HMRC to join the scheme, and you can do so voluntarily if your turnover is under the current threshold.
You will have to leave the VAT Flat Rate Scheme if, after a year of joining, your turnover in the past 12 months exceeds £230,000 (including VAT), or if you expect it to be this amount or more in the coming 12 months.
What are the advantages and disadvantages of the Flat Rate Scheme over Standard Rate VAT?
When looking at the differences between Flat Rate and Standard Rate VAT, there are two main advantages with using the VAT Flat Rate Scheme.
Firstly, there’s far less administration involved for business owners. Completing the online form for flat rate VAT is straightforward, because you only need to tell HMRC how much you have charged in VAT in total. There is no need to reconcile the amount of VAT you pay on purchases with the amount you are charging to customers.
The second main advantage with the VAT Flat Rate Scheme is that there is an opportunity to earn money, as you can keep the difference between what you charge customers and what you pay to HMRC. Whether or not you make money depends on the rate that applies to your business, which is subject to the nature of your business.
The main disadvantage with the VAT Flat Rate Scheme compared with the Standard Rate VAT is that you cannot reclaim VAT on your purchases. So, if your business makes a lot of purchases on which you pay VAT, it may be worth working out if Standard Rate VAT would be more beneficial.
Another potential issue is that businesses must identify their flat rate of VAT according to their business type, and this classification may not always be clear.
Finally, you will need to consider the rate of growth of your business. If your business is likely to reach the upper turnover limit of £230,000 fairly soon, it may not be worth registering for Flat Rate as you would quickly have to switch to Standard Rate.
Flat Rate VAT or Standard Rate VAT – which is best for your business?
There are some important differences between the Flat Rate and Standard Rate VAT which we’ve highlighted here.
Whether you choose the VAT Flat Rate Scheme, or the Standard Rate VAT will depend upon the nature of your business, your turnover and how much you spend on VAT-able purchases.
It’s vital to take professional advice and talk over your options before you make your final decision.
Here at Office Assistants, we advise lots of businesses weighing up their options with VAT registration. Whether you are considering registering voluntarily, or you are nearing the threshold for mandatory registration, we can help you make an informed decision by showing you the pros and cons of all the available options.
For the help you need, you are welcome to get in touch.