Forum Categories › VAT REGISTRATION › Which flat rate should I use and will it benefirt me to register before exceeding £85k threshold › Reply To: Which flat rate should I use and will it benefirt me to register before exceeding £85k threshold
Simon, you are technically right, you will be adding 20% to your invoices but you pay 12% to HRMC (and you dont claim input VAT on your expenses you incur). Normally a VAT registered business charges 20% on its sales (which is paid to HMRC) and is charged 20% on its purchases and expenses( which it claims from HMRC) – the net amount is claimed or paid to HMRC.
The Flat Rate VAT Scheme is a simplified scheme for businesses with an annual turnover of under £150,000 (excluding VAT), whereby a business pays a fixed percentage of its annual turnover. It enables businesses to keep the difference between the amount paid to HMRC and the amount of VAT charged to customers – it can save you money or cost you money depending on the expenses you incur – in your case since you don’t have any purchases, it is likely to save you money.
Information regarding the trade sectors and flat rate percentages can be found in Vhttps://www.gov.uk/vat-flat-rate-scheme/how-much-you-pay You would use these rates if you’re not a limited cost business (also see link above). If you’re a limited cost business you need to use 16.5%.
Due to the abuse of the flat rate scheme, HRMC now classifies a business that spends a small amount on goods as a ‘limited cost business’ or ‘limited cost trader’ are must pay a higher flat rate of 16.5%.
Given you don’t have many purchases, it likely that you are a limited cost trader and hence 16.5% will apply instead.