If you're a freelance contractor or small business working through a limited company and you have sales of £150,000 or less per year, the chances are you would benefit from being on the flat rate VAT scheme, EVEN if you do hot have sales that mean you automatically have to register for VAT (£79,000 per year or more). This is normally the case where your business expenses are low in relation to your sales, because for example you work from home or client's premises and/or you are mainly selling your own time, rather than goods or other services.
Under the standard VAT rules, you charge your customers 20% of the invoice value in VAT but you have to collect this and pay it over to HMRC, after deducting any VAT you've incurred on allowable business expenses.
Once on the flat rate scheme, however, you still charge your customers 20% of the invoice value, just like with normal VAT (and most customers in most industries expect this and are able to reclaim this back). Unlike the normal VAT scheme, however, you do not reclaim the VAT on the expenses you incur, which is likely to be minimal. Instead, you keep the 20% you have charged to your customers and pay a fixed (flat) rate of VAT to the tax man, depending on the industry you are in. Typically this is in the region of 12% to 14% of your sales. Therefore, you get to keep the difference between the 20% you charge and the 12% to 14% that you pay. This usually more than outweighs the VAT you incur on your business costs, leaving you with more in your pocket!
What's more, there's even a 1% discount to the rate you pay in the first year!
It's also much simpler to account for, as you don't need to worry about setting off the VAT you incur on expenses against the VAT you owe from your sales each quarter - you are simply paying a fixed percentage of your pre-VAT sales to HMRC each quarter instead and this never changes.
You have to have sales of £150,000 or lower to join the scheme but once joined, you only have to leave the scheme if your sales reach £230,000 or more.
So, even if you are below the VAT threshold, the chances are that registering for VAT on the flat rate scheme will mean you are better off and is very simple to manage. Being registered for VAT can also present a more professional image to many customers who see at as a sign of legitimacy in a small business.
Your accountant should advise you if the scheme is right for you - it should be in most cases where your sales are less than £150,000 peer year and your business expenses are relatively low.