Self-employed? Make extra money from the VAT rise

Published 02nd Jan 2011

Many workers can opt to pay the taxman a lower rate of VAT but still charge 20pc.
How to make extra money from the VAT rise

We are expected to be around £158 worse off this year in light of VAT being raised to 20pc from 17.5pc on Tuesday – yet many workers will be able to turn the increase to their advantage by paying a lower rate of VAT to the taxman.

Those working as freelancers or consultants with gross earnings below £150,000 a year may be able to reduce their VAT by registering for a special scheme.

"The scheme appeals to many small and one-man-bands as it aims to simplify VAT matters, but perhaps even more appealing is that it can lead to savings of several thousands of pounds a year," said John Rainsford, associate director at Smith & Williamson, the accountancy and financial services group,

The flat-rate scheme allows small businesses to calculate the amount of VAT they pay over to HM Revenue & Customs (HMRC) by applying a rate that is below the standard one to their gross turnover. There may be winners and losers, but normally professionals such as surveyors, solicitors and designers with freelance earnings will gain from the flat-rate scheme.

Different professions qualify for different VAT rates, as set by HMRC. For example, from Tuesday a management consultant would apply a rate of 14pc, a surveyor or architect 14.5pc, freelance secretaries 13pc, a sports trainer 8.5pc, hairdresser or beautician 13pc and a lawyer 14.5pc.

So, for example, a freelance lawyer may raise an invoice for £3,000, plus VAT at 20pc (from January 4), making a total charge to the client of £3,600. However, if the lawyer is registered under the flat-rate scheme, VAT is payable to HMRC at only 14.5pc.

So taking the £3,000 invoice as an example, the lawyer would receive £600 VAT in relation to this invoice, but would pass only £522 to HMRC (14.5pc of £3,600) enabling him or her to pocket the difference of £78. Depending on the business's annual turnover (see box), the savings could run into thousands of pounds.

Mr Rainsford added: "The tax authorities seem keen to promote the scheme. Businesses can even log onto their 'Ready Reckoner' to see if they would end up paying less VAT."

But Mr Rainsford said that anyone considering registering for the flat-rate scheme should recognise that, in return for using a lower rate of "output" VAT to calculate the VAT owed to HMRC, VAT on purchases can be recovered only if they are either capital items costing more than £2,000 (including VAT) or stock and assets on hand at the date of registration.

"Therefore, businesses with relatively few business expenses compared to their turnover or fee income tend to benefit from the scheme," he said.

What's more, businesses in their first year of VAT registration get an extra tax break as the flat-rate percentage for their category of business is reduced by a further one percentage point.

Lorraine Parkin, a partner at Grant Thornton, the accountancy firm, said: "If a business has a turnover of less than £70,000 in any 12-month period, it may choose not to register for VAT as it falls below the VAT registration threshold. The UK has one of the most generous registration thresholds in the EU to help smaller businesses. However, if a business has a turnover between £70,000 and £150,000, or has a smaller turnover but wishes to register for, say, business reputation reasons, the flat-rate scheme could be a very attractive, simple option."

However, accountants warn that care needs to be taken to select the appropriate business category at the outset. This may be more difficult than you think.

For example, a freelance journalist could come within the "entertainment or journalism" category with a 12.5pc rate applying from January 4. However, a journalist who also publishes their own material and organises cultural events around the material they publish will need to decide which is their main category of business from the following options: entertainment & journalism (12.5pc); publishing (11pc); and cultural activities (9.5pc). The rate for the category chosen will then be applied to all business turnover.

Mr Rainsford added: "The flatrate scheme is not for everyone, but it may be worth considering if it means paying less VAT to HMRC."


EXAMPLE

A general builder could benefit under the scheme from a 9.5pc VAT rate. If our builder has a taxable turnover of £100,000, the cash benefit of joining the scheme could be substantial over the year.

Turnover £100,000

VAT £20,000 invoiced to customers

Total £120,000

Flat-rate VAT scheme calculation £120,000 x 9.5pc (flat-rate scheme percentage for small builders)

FRS VAT £11,400

The flat-rate scheme VAT of £11,400 in this example must be paid over to HMRC. The difference between the amount charged to customers and the amount paid over to HMRC (£8,600 in this example) can be retained by the business.

Source: ' Telegraph '

View All Latest Articles