On the other hand, charging VAT to businesses that are not VAT registered may become less appealing as they would not recover the extra cost paid in the name of VAT. VAT registered businesses can reclaim the excess VAT paid. VAT registered businesses that deal in zero-rated services or products like children’s clothing, food, health and welfare, etc can also reclaim the VAT from HMRC.
For businesses, it is worthwhile to outsource this function to an accounting firm so that the managers can focus on business.
Flat Rate Scheme
Under the flat rate scheme for VAT, a business pays a fixed percentage of VAT on its annual turnover to HMRC regardless of the net balance of its VAT account. However, small businesses and sole traders such as IT contractors, consultants, hairdressers, etc., with a low volume of input cars take advantage by registering for a flat rate VAT scheme because of their low expenses on purchases. The scheme is another way for small businesses to determine how much VAT they can pay to HMRC.
A business that uses the flat rate scheme charges or recovers output VAT from their customers and usually pays input VAT to their suppliers on goods or services bought from them. However, only output VAT is computed under the scheme, while input VAT is ignored as one cannot reclaim except for capital assets whose value exceeds £2K inclusive of VAT.
While preparing a VAT return, businesses will add up all of their sales, including any VAT they have charged and recovered from their customers through standard-rated, reduced-rated, zero-rated or exempt sales. However, sales that are outside the scope of VAT can be excluded.
On the annual turnover/quarterly, businesses pay a fixed percentage of those sales at a flat rate to HMRC. The percentage that businesses pay to HMRC depends on the type of business conducted unless a limited cost trader uses a fixed percentage rate of 16.5%.
Suppose the nature of the business is such that it falls in multiple categories of rates because the sales are of different kinds. In that case, businesses can choose a rate that applies to most sales, which they can then use to the total business sales.
VAT-registered businesses must submit their VAT returns online and pay any VAT due on those returns electronically. Like any other tax, VAT must be filed and paid by the due date to avoid any financial penalty to a specific percentage of unpaid VAT.
Smaller businesses may not have the expertise to handle the standard VAT system and keep a record of the input and output of VAT. The flat rate scheme requires all sales for VAT calculation, including zero-rated goods and services; this makes the scheme inappropriate for certain businesses.
It might not be a good idea to join a flat rate scheme if the business’s taxable sales include VAT-exempt sales, zero-rated sales, or a lot of standard-rated goods and services, as the business might end up paying more in VAT. This is because businesses not on the Flat Rate Scheme would normally get repayment from HMRC each quarter which they would lose if they joined the scheme.