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Flat VAT

The VAT "flat rate scheme for small businesses" was introduced in April 2002. It's supposed to be simpler than normal VAT - instead of claiming input tax on most expenses, you pay a lower rate of output tax on your income. In fact, it can be complicated, because there are different flat rates for all different kinds of business, and you have to decide whether you get a good deal or a bad deal out of the rate that applies to you.

For example, you might have sales of £100,000 net, and input tax of £2,000 a year. On the normal basis, you pay £15,500 to Customs - £17,500 output tax less the input tax. If your flat rate is 12%, you apply it to the gross income - £117,500 - and get straight to the amount you pay - £14,100.

Customs are obviously keen on the scheme, because it must make it easier to police small businesses (no input tax invoices to check). They extended it to traders with turnover up to £150,000 in April 2003, and now they have improved it by cutting the flat rates from 1 January 2004. If it was on the borderline of being a good idea before, it will be now; if it was not beneficial before, it's worth looking at again. There's even an extra discount if you use the flat rate scheme in the first year of trading.

If you have taxable turnover of up to £150,000, and you are interested in the flat rate scheme, we will be pleased to advise you.