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who knows about the flat rate VAT scheme?

(25 Posts)
lisalisa Thu 15-Sep-11 21:43:40

Can anyone verify what I have found out please? It seems a bit too good to be true so it probably is! From my reading of HMRC website it seems to be that a busniess owner can opt for a flat rate of VAT where turnover is under £150,000. That flat rate differs for different businesses but my sector is 14.5%. I would charge normal VAT rate of 20% and only pay to HMRC 14.5% thereby making an instant gain.

Is this correct?

gomez Thu 15-Sep-11 21:46:45

Yip. That's correct. Flat rate based on turnover. You can't reclaim VAT paid however so if you have lots of purchases need to consider. You get a 1 % discount on your flat rate during first yr of registration too. If you are a service based company probably worth it.


spiderslegs Thu 15-Sep-11 21:51:26

Yes - what Gomez said.

lisalisa Thu 15-Sep-11 22:10:54

Thanks gomez. I am quite amazed that my accountant did not alert me to that . Her advice was not to register for VAT until i needed to. i am a lawyer btw just in case it changes anything you said.

Can I backdate registration?

lisalisa Thu 15-Sep-11 22:13:36

And goodness gracious this is the first time I have ever heard of HMRC giving businesses a leg up! Do either of you gomez or spiderslegs know anything about payment of taxes on a company? If so can I ask you some very basic questions which i am afraid have flummoxed me!

spiderslegs Thu 15-Sep-11 23:03:52

Yes & yes.

Re backdating reg, see here

gomez Fri 16-Sep-11 07:57:45

Re Qs stick them on and I'll see if I can help. Probably later this shining or possibly tomorrow however.

ChasingSquirrels Fri 16-Sep-11 13:49:36

if you aren't registered and are mainly business to customer rather than business to business (ie your customers aren't VAT registered) then while you might theoretically make the margin on the VAT, you will have to put your prices up 20% to cover this - would your customers accept that?

mranchovy Fri 16-Sep-11 18:18:55

WAIT - read what the ChasingSquirrels says (and listen to your accountant). Unless you are providing your legal services to entities that can reclaim VAT, you are better off not being registered until you have to (at £73k turnover).

mranchovy Fri 16-Sep-11 18:19:50

And yes, I know a few things about business taxation grin

lisalisa Sat 17-Sep-11 22:18:38

Thanks all. Yes I am providing legal services only to those who can reclaim vat so absolutely no disadvantaage that I can see.Thanks for posting backdated regs spiderslegs - Problem is that I can't see anything about backdating flat rate registration . Wonder if you can?

gomez Sun 18-Sep-11 00:43:18

This link will provide more information on back dating

s.5 provides guidance.

But depends in when you registered for VAT and to an extent your tac official.

gomez Sun 18-Sep-11 00:46:34

Or tax official clearly, oops. Your application for the flat rate scheme asks when applicable from, you can state a date at this point and a historical date may be accepted if 'reasonable'.

Your acceptant should have advised you in this tbh.

mranchovy Sun 18-Sep-11 01:22:09

> I am providing legal services only to those who can reclaim vat

Well in that case, unless there is some unusual situation you haven't mentioned you should have registered from day 1 on a flat rate scheme, it sounds like your accountant may not be on the ball. As gomez says you don't have the right to backdate flat rate registration, it is up to HMRC's discretion so ask them nicely grin

Bear in mind that if you do backdate registration (flat rate or not) you will have to go back and issue tax only invoices for the VAT due from the date of registration. You will have to pay this output tax to HMRC, but you might have problems getting payment from your clients even though they can claim it as input tax.

lisalisa Sun 18-Sep-11 14:54:10

Thanks gomez - you are of course quite correct and the disadvantage of goind back and asking for VAT from clients in relation to past invoices will I think outweight the small advantage now of registering. Quite cross with m yaccountant for not recommending this to begin with. As she refers work to me though it is a bit tricky to just leave her.

I had another question if that is ok? One of my clients who I work for ( a law firm as it happens) have recommended incorporating a service company who will then carry out the work rather than me doing it as a sole trader.They think there are tax advantages to being a company rather than sole trader and have produced some literature on it.

Having read it I'm sure I must be missing a trcik as it soounds wrong to me. For e.g. if I am a sole trader I pay just income tax on what I am paid. If i am a company then I lose through double taxation it seems as if teh profit is extracted via dividends then I must pay approx 25% on them ( assuming I am not in higher band rate) and then the company must pay corporoation tax on the profits after dividend payment at 20%.

My calculation

Say profit of £50,000. I take £25k as a dividend ( no idea actually whether to take all profit as a dividend or some as salary making myself an employee etc). I then pay 25% tax on that dividend meaning I lose £6250.

On the remaining profit left in the company being £25k I must then pay 20% corp tax meaning I lose another £5,000.

Tax loss in total being £11,250.

If I am a sole trader and just pay income tax I will pay only 20% income tax on up to £35,000 ( I know I have ignored personal allowances here but want to simplify it) and then 40% on the balance meaning a tax loss of £7000 +£6000.

Tax loss of £13,000.

So it sounds better to be a service company but I can't imagine that this double taxation point is correct - that dividends are taxed and then the rest is subject to corp tax. Or would I just pay it all to myself as a dividened? Btw - my earnings are only about £40,000 per annum at moment so tax is crucial to try and minimise.

ChasingSquirrels Sun 18-Sep-11 15:37:43

You don't pay 25% dividend tax if you are a basic rate tax payer.
Dividend pd = £9,000
Associated tax credit = £1,000
Taxable dividend income = £10,000
Dividend tax rate if basic rate tax payer = 10% which is covered by the associated tax credit.
So no further personal tax paid.

Company take. is paid on profits before dividends which are not a tax deductible expense.

At current personal and company tax rates you are better of using dividends whatever the circumstances (after you have utilised your personal allowance) but the costs of operating a company may outway the tax savings.

ChasingSquirrels Sun 18-Sep-11 15:40:04

How much work does your accountant refer? I think you need better advice, either from your current accountant or someone else.

lisalisa Sun 18-Sep-11 20:36:44

Thanks chasingsquirrels - when you say the cost of operating a company - what is the cost? Just filing accounts at year end surely? Does basic rate taxpayer stop at £35k so if I earnt only £35k and had a limited company operating I would just pay all this as a dividend and pay no tax at all?

mranchovy Mon 19-Sep-11 01:16:34

Just to put some perspective on this, with profit of £40,000 flat rate VAT could be worth £1,000 a year to you. Operating as a company could be worth £3,000 (it's not tax, it's the 9% Class 4 NI you save), although you might pay more in accountancy fees (limited company £600pa+, self employed £200pa+). With £3,500 more in your pocket, you could afford to pay for referalls.

The main cost of running a company is not compying with Companies Act requirements, it is tax compliance (including producing full accounts in iXBRL format - if you don't know what that is, you don't need to grin)

It would be unprofessional of me to comment on the advice you have received sad

mranchovy Mon 19-Sep-11 02:09:14

I'm going to answer your '£35,000' question by working through the calculation to avoid any uncertainty.

Your company makes £46,900 profit before it pays you anything (or any tax) - you'll see why I chose that figure later. It pays you a salary of £7,475 which means your NI record gets credited for the basic pension, and uses your tax free personal allowance (which cannot be used by dividends) - the company will pay about £56 in employers NI leaving it with profit of £46,900 - £7,475 - £56 = £39,369. It will pay tax at 20% on this figure, £7,874, leaving net profit of £31,495. It pays you all of this in dividends which is a gross dividend of £34,995 less dividend tax of £3,500.

You pay 10% tax on dividends within the £35,000 basic rate tax band, which is equal to the dividend tax credit received, so effectively you pay no tax on the net dividend of £31,495. You have also received a salary of £7,475 less about £30 NI, so you receive £38,940 of the total £46,900 profit.

Compare this with a self employed person with the same gross income who pays 20% of (£46,900-£7,475) = £7,885 tax and Class 4 NI at 9% of earnings between £7,225 and £42,475 (£3,173) plus 2% on the remaining (£46,900-£42,475) (£89), only keeping £35,753 of her hard-earned profit.

Apologies in advance for any errors, it is a bit late and I may not be copying them across correctly from my spreadsheet grin.

ChasingSquirrels Mon 19-Sep-11 11:07:15

Well I don't need to answer now :-)

lisalisa Mon 19-Sep-11 15:19:27

Hmmm thank you very very much mranchovy. The only bit of the calculation i don't understand is the dividend tax credit. I follow you up to where I have a net profit of £31,495. What I don't understand is that this becomes a gross dividend of £34, 995 as surely the dividend ( even if it is gross) can't be more than the net profit ( as dividends are paid out of profit)?

Also where you say I pay 10% tax o hte dividend there is no deduction for this in your calculation but you say it is " equial to the dividend tax credit received". I guess that must be the gap in the figure above between £34,995 and £31,495 but how and why do I suddenly get an extra almost £3.5k that i heavn't earned? Do the government bump it up ?

Btw I am really indebted to you for such fantastic advice .....

ChasingSquirrels Mon 19-Sep-11 16:10:42

The 10% tax credit is sort-of fictional.
A UK dividend is treated as having a 10% tax credit attached to it (even though no actual tax has been paid) and as a result the taxable dividend is the amount received + the tax credit.
You are then taxed on the gross amount at 10% but given an allowance for the tax credit (of the same amount) leaving you with no actual tax due.

(there is a long back-story to this, but it isn't very interesting and has no impact on the decisions you need to make now).

mranchovy Mon 19-Sep-11 23:55:04

Now I don't need to answer grin

lisalisa Tue 20-Sep-11 14:59:43

You are both very helpful - thank you

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