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Can VAT Help To Boost Your Profits?

The VAT Flat Rate Scheme allows some smaller businesses to benefit from paying a lower rate of VAT to HMRC. The scheme is often used by contractor type businesses, but is less widely used in the leisure sector.

Instead of declaring the standard 20% on sales, you pay a lower percentage to HMRC that varies depending on the sector category of your business.  Generally VAT on costs cannot be reclaimed except for capital assets over £2,000.

For example, a holiday accommodation rental would raise an invoice for say £1,000 plus £200 VAT to the customer, with the £200 ordinarily paid to HMRC. Under the flat rate scheme, you pay over 9.5% of £1,200 (the VAT inclusive price) which is £114, keeping the £86 difference for yourself!

The benefits of the VAT Flat Rate Scheme are:

  • Increased profits as some of the VAT charged can be kept by the business
  • Easier to calculate the VAT as you only need to look at the business income
  • VAT on some larger expenses can be reclaimed (some capital goods over £2,000)
  • VAT registration can give the perception of a well-established business and the flat rate scheme reduces the administrative burden
  • There is a further 1% discount in the 1st year as a VAT registered business.

However, the VAT Flat Rate Scheme is not suitable for everyone. It generally only suits businesses with a relatively low cost to sales ratio but do not fall into the “limited cost trader” category. The drawbacks of the scheme are:

  • Your turnover must be below £150,000 to join and you must leave if your turnover exceeds £230,000. There is a more complex calculation if you have reduced-rate or exempt supplies.
  • You can’t reclaim the VAT on most costs.

If you are defined as a limited cost trader, the flat rate percentage is increased to 16.5% which negates the benefits stated above.

If you would like more information on the VAT Flat Rate Scheme, please contact our VAT Taxperts.

Alternatively, if you have any queries regarding your leisure business, please email the EQ leisure team.

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