If your annual turnover is less than £150,000, you may be able to increase your profit using the Flat Rate Scheme for VAT. With some research and just a little extra paperwork, it's possible boost your bottom line by thousands of pounds.
Too many self-employed people don't know about the Flat Rate scheme and are missing out, according to Mark McLaren, managing director of accounting software provider Solar Accounts. "We find that many of our users are simply unaware of the Flat Rate Scheme", he says. "In today's difficult economic climate, this could prove a major competitive disadvantage."
How Does It Work?
Put simply, the Flat Rate Scheme could allow you to collect more VAT than you pay out. The difference results in extra profit for your business.
Normally, businesses have to keep track of how much VAT they collect from customers and the amount they pay to suppliers. If a business has collected more VAT than it has paid to suppliers, the difference must be paid to HM Revenue and Customs (HMRC).
However, under the Flat Rate Scheme the amount paid to HMRC is calculated simply as a percentage of the turnover, so the total VAT collected may not equal the VAT paid out. In this way, the scheme can generate extra profit for the business. But a word of warning, in some cases using this method could result in a loss.
The flat rate percentage differs from sector to sector and can range from 2% to 13.5%. With this in mind, you need to do a little research to calculate if it would be profitable for your enterprise.
Consider a freelance journalist with current income of £32,000 per year and minimal expenses.
Under the Flat Rate Scheme, he would be able to charge an extra 17.5% as VAT, bringing his turnover to £37,600. (His VAT-registered clients will usually not mind this increase as they can claim it back from HMRC.) Also under this scheme, he must pay 11% of his turnover (£4,136) to HMRC, leaving him with £33,464. Therefore, by using the Flat Rate Scheme he would increased his profit by £1,464 per year.
Even better, the Flat Rate is reduced by 1% for the first year you are under the scheme. This means our journalist would only have to pay £3,760 to HMRC, so his profit would jump by £1,840 in the first year.
Is it Right for You?
Not every business will benefit from this scheme. "It's important that self-employed people fully understand the scheme", says McLaren. "They should ask their accountant to see how it applies to their circumstances".
Another good resource is the HMRC Ready Reckoner website at http://vatreadyreckoner.hmrc.gov.uk - here you can calculate the effect of the scheme on a particular business.
Use Appropriate 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 it. 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.
An accounting software package such as Solar Accounts could easily tell you at the click of a button whether you are making more profit under the scheme.
For further information on the Flat Rate Scheme from VAT see HMRC Notice 733 or call the HMRC National Advice Service on: 0845 010 9000.
To see how the Flat Rate Scheme is handled in Solar Accounts visit: www.solaraccounts.co.uk/flatrate
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Notes to Editors:
For further information about Solar Accounts contact:
Tel: 0208 099 8072
Or visit: www.solaraccounts.co.uk
Mark McLaren, Managing Director of Solar Accounts is available to answer questions regarding Solar Accounts. To arrange an interview telephone: 0208 099 8072
Solar Accounts can be downloaded on a 30-day trial. No personal information or credit card details will be taken during this trial period.
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