The way we do business has been drastically changing over the years. Given the political climate of our world today and the uncertainties that come along, entrepreneurs and business owners are learning to be as agile as possible to survive and thrive.
What makes their job harder are government-imposed taxes and tariffs that have a great impact on any business’ bottom line and profitability. One of the most controversial tax types is the indirect tax, VAT. Even though it is a non-business tax, but rather consumer borne, when added, value added taxes can seemingly increase the end-price consumers have to pay in exchange for goods or services. This, in effect, plays a big role in interrupting the demand patterns for a business’ products and, as a result, its profitability.
VAT is used by hundreds of countries around the world to protect the welfare of local businesses and give them a fair chance in competing against imported goods. The VAT rate is calculated as a percentage of the price of products which is decided upon by the seller; however, the standard rate, as well as minimum one, varies among different industries and countries. The most common complaint that businesses have when it comes to the VAT is the bureaucracy involved and the tons of documentation burden it requires, which led to the emergence of the VAT Flat Rate Scheme.
Continue reading below to understand more about this scheme, and its purpose for business sectors.
What Is a VAT Flat Rate Scheme?
In the UK, according to the HMRC, which is the entity responsible for tax collection and revenue, businesses which make a total turnover of 150,000 British Pounds, or less, can register to benefit from the Flat Rate Scheme. If you are a business owner in the UK, seek information on the HMRC website, which explains what the Flat Rate VAT Scheme is all about and whether it will be the right choice for you. In general, under this scheme, such businesses end up paying the exact amount of VAT of the gross sales figure without the hassle of getting into complicated paperwork that is often related to the calculation process on each purchase and sale.
A VAT Flat Rate Scheme Will Save Businesses Time & Money
When businesses register for the Flat Rate Scheme, they will save a lot of money that is usually wasted in the costly process of calculating the VAT at each stage along the supply chain. This is especially rewarding for small businesses that cannot afford the overhead costs of hiring specialized personnel to manage their VAT calculations. Just like any business, time is money. When using the Flat Rate Scheme, no longer will there be wasted hours spent by the end of each month to accurately record VAT entries in the company’s books. Besides, businesses that adopt the Flat Rate Scheme will get to benefit from a 1% discount during their first year of joining.
This Scheme Will Encourage More Private Businesses to Start Up
Without the need to worry about the complexities of calculating the VAT and since the Flat Rate Scheme is relatively easy to work out, more people will be encouraged to start up their own private businesses. Since no specific skills will be required, small businesses will have a bigger talent pool to hire their accounting people from at an affordable price.
Joining a VAT Flat Rate Scheme Can Give Businesses More Financial Certainty
Knowing the exact amount that is expected to be paid for VAT will allow businesses to make more educated financial decisions based on real information they have. Decisions regarding reinvesting or operational expansions can be made easier when limiting the cost estimation element under the regular VAT calculation scheme. This will give businesses a better chance at succeeding and multiplying their turnover. However, it is worth mentioning that should at any point a VAT Flat Rate Scheme member company exceeds the allowed annual turnover threshold of 230,000 British Pounds, it will have to leave the scheme.
The VAT Flat Rate Scheme Can Encourage Businesses to Increase Their Costs
When a limited cost business, which spends less than 1,000 British Pounds on goods, joins the Flat Rate Scheme, the flat rate it will have to pay will be much higher than other higher cost businesses. This will encourage these businesses to increase their expenditure, which will give them an opportunity at a higher return on investment.
Adopting the VAT Flat Rate Scheme is optional for all businesses in almost all industries in countries that use the VAT system. However, deciding whether to join this scheme or not requires collaborating with specialized financial advisors who can help companies make the right decision in case they fulfill the entry requirements.