Is flat rate vat still worth doing in your first year?

Until now, you have been able to take advantage of the flat rate vat scheme “to make money out of the vat people”. The changes from 1 April 2017, to a flat rate of 16½% instead of 12%, 14% or 14½%, have basically brought this to an end. But not altogether!

The 16½% rate applies to your vat inclusive income. So on income of say £80000 on which you would charge 20% or £16000, the flat rate vat you would pay is £15840, ie. you “make” all of £160 out of it!

For this reason we would eventually urge a switch to standard rate. VAT recovered on PR expenses, accounting, mobile phone, replacement equipment, mileage, etc (as applicable to you), could be anything from £500 – £1250 of vat or even more if you run a vehicle through the business. Definitely worth doing.

However, in your first year of trading, a 1% discount continues to apply to flat rate vat, so that the 16½ becomes 15½%. Using the £80000 income figure as before, you would pay £14880 of vat, and so that you “make” £1120 from this.

What you “make” in the first year would obviously depend on your earnings:-

       
Turnover  VAT Saving
£50000 net of vat £700
£60000 £840
£70000£980
£80000 £1120
£100000 £1400
£120000 £1680
£140000 £1960

What this clearly shows is that the higher your company earnings, the more certain it will be that ‘useful’ savings would come from using flat rate vat rather than standard rate in your first year of trading. But even at a low level it will almost certainly be worthwhile too.

So we would recommend continuing with or applying flat rate vat throughout your first year of activity, and this would apply to you for 12 months from when your current company started to trade.