VAT Flat Rate Scheme Example

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VAT Flat Rate Scheme Example

There are a lot of rules and regulations surrounding VAT and the flat rate scheme is no exception.  Here is an example of the VAT Flat Rate Scheme to explain how it works:

Jo is a self employed actor earning £100,000 per year so therefore must become VAT registered.  Jo is considering joining the VAT Flat Rate Scheme so needs to consider the following:

Is the VAT Flat Rate Scheme Beneficial?

Under the VAT Flat Rate Scheme Jo will:

  • you pay a fixed percentage rate of VAT to HMRC based on the VAT inclusive amount you bill to your customers;
  • you keep the difference between what you charge your customers and pay to HMRC
  • you can’t reclaim the VAT on any of your purchases, except for certain capital assets over £2,000.

It is unlike the standard VAT scheme where amount of VAT you pay to HMRC is the difference between the VAT charged by the business to its customers and the amount the business pays to its suppliers.

In reality this means if Jo does not have many VATable costs, it may work out more profitable to pay VAT at a flat rate rather than 20%.

Jo needs to work out the applicable flat rate percentage and whether, based on sales and costs whether the VAT flat Rate Scheme is beneficial.  I have created a Flat Rate Scheme Calculator which estimates which VAT scheme is most suitable for you, based on simple criteria – if you enter your email address below I will send it to you for free.

How to Invoice Under the Flat Rate Scheme

Once Jo has decided to join the Flat Rate scheme, every invoices raised for work carried out must have VAT at 20% added to them (customers still need to pay a normal rate of VAT and they don’t need to know which VAT scheme you are using, just add you VAT number to your invoice).

So if Jo raises an invoice for 5 days work at £500 per day, the invoice total would be £3,000 (£2,500 plus VAT).

How to Fill Out a VAT Return

Under the flat rate scheme Jo must still fill out the same style VAT return as someone under the standard scheme, however the figures will be calculated slightly differently.

You find a step by step guide on filling in your Flat Rate VAT return here, where i walk you through each box, what needs to be included and how to work it out.