How far would you drive to save 20p/litre on fuel costs? How much haggling would you be prepared to do to knock £2,000+ off the cost of a new van? How about Hermes agreeing to increase your rates by 20%? This is what you’re missing out on by not being VAT registered.
Many people seem to be scared of registering for VAT – worried that the paperwork will be too much or that they’ll have VAT inspectors visiting every few weeks maybe. The paperwork is simple, and under the Flat Rate Scheme it’s so simple that it shouldn’t take more than a few minutes every three months to administer.
Using the Flat Rate Scheme Hermes add 20% VAT to all your invoices (this will make no difference at all to Hermes because they can claim the VAT back) and then pay a lower percentage (10% with a 1% reduction in the first year) of the total to HMRC once a quarter.
In case you’re not good with numbers that means that when Hermes pay you £100 they will add VAT at 20% = £120 including VAT and then have to pay £12 (£10.80 in your first year of registration) back to HMRC. That’s 8% of your turnover added straight onto your bottom line profits.
So what about the paperwork? Using the Cash Based Turnover Method of the Flat Rate Scheme you only account for VAT on payments you actually receive – so all that’s needed is to sit down once a quarter with your bank statements, add up all the payments you’ve had into your account and multiply the total by the Flat Rate percentage. That’s it. No piles of fuel receipts to sort through, no working out how much VAT you paid on the printer ink you bought with the shopping from Tesco, no messing about. You only claim back the VAT on capital purchases over £2,000 so everything’s made simple for you.
And there’s more good news. Providing you’ve still got the goods and the VAT receipts at the time you register you can claim back the VAT on any goods you bought for your business up to THREE YEARS before your registration date. So that van you paid £12,000 for 2 years ago is now worth a VAT reclaim of nearly £1800 to you. And the VAT on any ‘services’ you’ve paid for in the last 6 months can also be claimed back, as long as the service didn’t relate to goods which you don’t own any more (repairs to a van which you’ve sold on for example) and you’ve still got the receipt.
For businesses which subcontract a lot of work out to VAT registered subcontractors or which rent or lease their vehicles it can be more profitable to pay VAT in the normal way rather than using the Flat Rate Scheme. The paperwork is slightly more complicated but it’s still pretty simple and isn’t really a lot of extra effort added onto your existing responsibility for keeping proper financial records.
Most people have an idea of how standard VAT works I think, but the basics are that you charge vat at 20% on all the work you carry out. You then owe that 20% to HMRC but before paying them you deduct from it any VAT you’ve paid out in connection with your business – so you’re claiming back the VAT you pay out on your fuel, vehicles, subcontractors, phone bill, computer equipment, etc.
Whichever scheme you opt for, stop handing over your money to the Government for nothing and register for VAT as soon as possible.
Check out the links below for more help: