As this article is about VAT – I am unusually going to start with a health warning. Don’t mess with VAT authorities – if sales of your business are likely to be £81,000 or more you have to register for VAT. And while most of VAT is straightforward there are lots of wrinkles to catch you out – so take professional advice before you get in trouble. Getting a bad VAT record is actually a real pain – eg it will lead to more frequent inspections etc.

And when you are VAT registered DON’T look at your bank balance and think that is all yours – some of it will be owed for VAT. As a VAT registered business you are an unpaid collector of tax!

So what’s the flat rate scheme all about? Here are 3 steps to understanding it.

Step 1 – what is the flat rate scheme?
It is a scheme to make accounting for VAT easier for small businesses. Rather than the usual method of adding up sales VAT and taking off expense VAT, you apply a % to your sales including VAT and pay that. The % is set by HMRC depending on what you do. For example secretarial services is 11.5%. Some numbers might help explain this…

Sales £100.00 + £20.00 VAT
Expenses £20.00+£4.00 VAT

In a regular VAT return you would pay over £16.00 (£20.00-£4.00). However if the % was 10% for your type of business (to make the math easier to follow) you would only pay 10%x £120.00 = £12.00 a saving of £4.00

Step 2 – can anyone do flat rate?
No – you have to apply to the scheme and you can only join if your sales are under £150,000 when you join. Once on the scheme you can stay on it until sales reach £230,000.

Step 3 – would it benefit me?
Basically it suits businesses with relatively small VATable costs eg a consultancy/service type business where most costs are labour.

The above is very much a Numbers Coach™ simplification of the principles and, as you can imagine, there is more in the detail! So I suggest you read this great article by Emily Coltman Chief Accountant for Freeagent who make online accounting software. The article also has a link to a handy calculator to see if it will save you cash.

If you are still using spreadsheets to run your business, please believe me when I say that it will save you so much time to use an accounting package when you are VAT registered.