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What about the Flat Rate VAT scheme?

Another option to consider is the Flat Rate VAT scheme. As long as your turnover is less than £150,000 per annum, and depending on your business type, it is possible to gain financial benefits from registering for this. It provides a benefit because you charge at the standard rate (currently 20%) but you only pay at a lower rate. The difference is yours to keep, although you will be taxed on it as income. The Flat Rate scheme is also simpler to administer for you.

Take, for example, an IT freelancer who invoices £100,000 in a year:

  • They will invoice in total £100,000 + £20,000 VAT = £120,000.
  • However they only need to pay 10.5% of this total invoice (£120,000), so they will pay the government £12,600 in VAT.
  • The £7,400 difference is theirs to keep!

The reason for this is that the Flat Rate scheme simplifies VAT administration for HMRC and so the financial benefit is passed on, to a point. The rate you pay will vary depending on your business type and when you register for VAT this will be assessed and agreed up front.