Is your annual turnover below £79,000? and
Are your customers all or mainly VAT registered businesses?
Or, is your annual turnover between £79,000 and £150,000?
If the answer to the above is “yes” then you may be able to increase your profits by registering for VAT and applying the “Flat Rate” scheme. Under the Flat Rate scheme you pay to the tax office a proportion of your VAT inclusive turnover irrespective of your actual VAT on sales and purchases. However, you add the usual VAT to your sales price, and this is reclaimable by your customers if they are themselves VAT registered.
For instance, let us take as an example a business operating as a management consultant to a number of VAT registered businesses. Its turnover is £60,000 per annum but there are only a few purchases on which there is reclaimable VAT. If the business registered for VAT then it would need to add VAT of 20% to all sales invoices, amounting to £12,000. However, as the customers are VAT registered then they will be able to reclaim the VAT which means that the price to them is unchanged. However, the flat rate percentage for a management consultant is 14%, which on £72,000 (£60,000 plus VAT of £12,000) means that the business will only pay over a total of £10,080 resulting in an increase in profits of £1,920 – simply by registering for VAT.
Similar gains may also be available if you are currently VAT registered but have a turnover below £150,000. If your turnover is above £150,000 then the flat rate scheme is not available.
Of course, the flat rate percentages used are an average, which means that they may not work for everyone. Each case must be examined on it’s merit. However, if you think that this may be advantageous in your case then please contact us for further advice.