If you are a vat registered trader in the UK where the system of VAT or value added tax is followed then you can use vat flat rate to reduce your accounting efforts. This vat accounting scheme is offered by HM Revenue and Customs or hmrc for traders that have vat taxable sales of less than £150,000 in a year.
In the UK you will need to go in for vat registration as soon as your taxable sales touch the vat threshold limit of £70,000 in the past 12 months. You can opt for several schemes including the flat rate vat scheme that enables you to pay a fixed percentage of your vat inclusive sales to the hmrc vat department. If you opt for this scheme in the first year itself then you can get an advantage of a 1% discount in your vat rate for the first year. You can remain under this scheme until your total business income touches the upper threshold limit of £225,000.
However, since standard vat rates in the UK are slated to increase to 20% from the current 17.5%, vat threshold limits including vat flat rate threshold limits too are bound to change from January 4, 2011 onwards. You should ask your vat agent or visit the hmrc website to get the exact details for the year 2011. If you are running a business that falls under several vat rates including the standard vat rate, reduced vat rate or the zero vat rate then the flat rate that you will need to apply will be based on the rate that contributes the most to your turnover. This could prove to be a boon or a bane depending on the vat rate that contributes the most to your turnover.
There are several other advantages and disadvantages related to the flat rate scheme. The biggest boon is that you will not be required to maintain detailed accounts of each vat sale that would otherwise be necessary if you opt for the standard vat accounting scheme. You will also be eligible for a 1% discount on vat rates in the first year of the scheme. You will also know as to the exact rate of vat that you need to pay to hmrc at any given time. These features will help you to spend less time in vat accounting and more time on increasing your business.
On the other hand there are a few disadvantages if you opt for this form of vat collection and payment. If most of your purchases are of standard vat rate goods and services then you will not be able to reclaim any vat on those purchases. If you regularly receive vat repayments from hmrc under standard vat accounting then opting for flat rate could end this cash flow. If most of your sales are of zero rate vat goods or services then you might simply end up paying a flat rate on them. You should thus consult your vat agent or vat consultant before opting for the flat rate scheme. Other eu countries might also offer various vat accounting options and if your business is in another eu country that follows vat then you should certainly explore all options before entering a scheme that best suits your business interests.
While turning into a vat registered trader in the UK, you will be allowed to choose from various vat accounting systems based on your taxable turnover, among other criterion. You should certainly opt for the vat flat rate scheme if you want to reduce your accounting efforts without ending up paying additional vat amounts in your vat returns as compared to other vat schemes.