There are two different types of VAT scheme that you can join when you register - Standard Rate or Flat Rate. Essentially they denote how your VAT is paid to HMRC.
Whats the difference?
Standard Rate VAT
The Standard rate VAT scheme is the conventional method of calculating how much VAT you owe HMRC. It works by deducting all the VAT youve paid on expenses from the VAT youve charged on your invoices. The difference is the amount you have to pay HMRC in VAT.
This scheme works particularly well for businesses that have numerous expenses (such people who work in trades) as you can often reclaim the VAT of your purchased assets.
When you file your first VAT Return, you can also reclaim VAT on assets you have purchased before registering - as long as you still own them and theyre 100% for business use.
You will have the VAT offset from the amount payable on your first VAT Return - you will need to let us know before the VAT deadline.
Flat Rate VAT
On the flat rate scheme the amount of VAT you owe to HMRC is calculated from your sales only. Its essentially designed to save you time on your accounting by making you pay over a flat (hence the name!) percentage of your sales, rather than having to calculate each transaction individually.
You still charge 20% on your sales but the percentage you pay to HMRC varies depending on which sector your business operates in. For example, the IT sector pays 14.5% of their gross sales.
The difference between what you charge on your gross sales and what you pay to HMRC is kept in the business as additional income. The only downside is that this additional income goes towards your overall profit and could be taxed.
A bonus of the Flat Rate scheme is that there is a 1% discount if you are in your first year of VAT registration.
Its worth noting however, that if your businesses has a turnover in excess of £150,000, you cannot make use of the Flat Rate scheme, and must use the Standard Rate scheme.
Flat Rate scheme and expenses
Although you cant reclaim VAT on individual expenses as you can with the Standard Rate scheme, you can, on your first VAT return, reclaim VAT for any assets purchased before you registered (again, as long as you still own them and theyre 100% for business use). You can also reclaim VAT on any asset which has an individual cost above £2,000.