Which VAT Scheme Should I Choose?
My annual turnover is likely to exceed £85,000 so I need to register for VAT. Which scheme should I choose?
Standard rate Scheme
The one drawback of this scheme is that you need to ensure you only deduct the correct amount of VAT. You will need to check each invoice to make sure UK VAT has been charged. In some cases, you will need to provide your VAT registration number to the supplier so that VAT is not charged, for instance to LinkedIn who operate from Ireland (if they add VAT to their invoice you cannot recover it). Therefore, there is a bit of work to do to make sure you get it right.
Flat Rate Scheme
The rate applied to gross sales depends on the business sector most applicable to you, and for most consultants this used to be between 12% and 14%. However, in April 2017, a new category was introduced called the Limited Cost Trader, for which the rate is 16.5%. This category applies to the majority of our clients, because they make limited purchases of relevant goods like stationery and books (capital assets, food and travel are excluded). This means if you opt for FRS, you are more than likely going to have to use the rate of 16.5%, and for a turnover of £100k pa, the VAT you would get to retain would be only £200, making it less financially attractive than the Standard Rate Scheme.
However, in the first year of VAT registration you are given a 1% discount, so you would apply 15.5% in the first 12 months, increasing the VAT saving to £1,400 on turnover of £100k. This makes the scheme slightly more appealing because it gives you a reasonable retention of VAT in the first year and has the advantage of being easy to apply, making your VAT returns very simple whilst you are getting to grips with everything else. You can switch to the Standard Scheme at any point, and may wish to do so after the first year.
The higher you forecast your turnover to be, the higher the savings to be made from FRS. You should assess the amount of VAT you think you will incur in your first year, and compare this to the savings using FRS. There may of course be situations where the Standard scheme is still best for you, such as if you are going to hire sub-contractors, and therefore you will have a substantial amount of VAT incurred that you will want to recover.
Here are some examples to help illustrate the comparable savings from the two schemes, using different scenarios:
Whichever scheme you choose, you may also recover VAT on business expenses incurred prior to registering for VAT. Time limits apply, but generally this means expenses incurred up to 6 months prior to registration (sometimes more for capital assets).
For further advice please get in touch with us. We would be happy to discuss your individual circumstances.
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