If you pay VAT in the UK, you have two options – the standard VAT return or the flat rate scheme. Many business owners choose the latter, and for good reason. If you’re wondering whether it’s the right choice for you, it’s best to understand the main benefits of the Flat Rate Scheme.
Who Is the Flat Rate Scheme For?
The Flat Rate Scheme, as a simplified VAT reporting method, is reserved for businesses that meet specific conditions. Your business qualifies for the FRS as long as its annual turnover does not exceed £230,000.
What are the main benefits of the Flat Rate Scheme?
With the Flat Rate Scheme you can:
- save time,
- improve cash flow,
- reduce the amount of required paperwork,
- Benefit from a rebate in the first year of trading.
1. You Spend Less Time on Tax Matters
Using the Flat Rate Scheme means that you do not have to record the VAT you charge on each sale and purchase as you would with the standard VAT method. This saves time on accounting tasks, allowing you to spend more time running your business.
Remember, however, that not having to document VAT for each transaction doesn’t mean you don’t have to show it on invoices. In this respect, everything remains the same as when using the standard VAT system.
2. You Have Better Cash Flow
With FRS, you don’t have to calculate VAT on purchases. Instead, you pay a fixed rate of VAT to HMRC. The downside is that you cannot reclaim the VAT on your purchases.
3. Reduce the amount of paperwork required
Another advantage of the Flat Rate Scheme is that there are fewer rules to follow, which means less paperwork, less chance of making mistakes and certainty – you always know what percentage of your income you have to pay to HMRC.
4. You Get a Discount in the First Year
In the first year after registering as a VAT payer, you will receive a 1% discount through the Flat Rate Scheme. This discount is valid until the day before the first anniversary of your VAT registration.
The flat rate scheme can be a great solution for many businesses. However, it’s not without its drawbacks. If you’re unsure whether the FRS is the best choice for your situation, or whether you should stick with the standard VAT method, it’s best to consult an experienced accountant.
