The intention of the Flat Rate Scheme is to simplify the process of reporting VAT for businesses. VAT payable becomes simply a factor of VAT inclusive sales for a quarter – removing the need to analyse input VAT on purchases. See here for our recent blog on the Flat Rate Scheme.
There is also an opportunity to make money by using the Flat Rate Scheme. This centres around small service companies, but could be considered for other businesses.
Say Mike has a management consultancy which registers for the Flat Rate Scheme. In the first quarter, he invoices £10,000 + VAT = £12,000. The Flat Rate Scheme rate for management consultancy businesses is 14.0%. Thus, the VAT he pays over to HMRC is £12,000 x 14% = £1,680.
Therefore, he charges his customer £2,000, but only pays over £1,680, giving him a profit of £320. Simply for being VAT registered. Essentially, this is to compensate for not reclaiming any input VAT. However, for a service business, any input VAT would be minimal.
This is a very simple example, but it illustrates the potential upside.
Note: in our view, we believe that it is imperative that you take professional advice before registering for VAT and/or the Flat Rate Scheme.