VAT Flat Rate...

First off, let me state, I'm way out of my depth here as I've never had anything to do with VAT registration in the past.

I'm just wondering how the VAT Flat Rate applies to retailers (such as us) if we were to voluntarily apply to pay VAT. I'm asking mainly for my daughter who has a successful sole trader ebay business going with an annual turnover of around £60,000. She pays VAT on the product she buys from a UK distributor and was wondering if the Flat Rate scheme would be beneficial to her. I realise that on the Flate Rate you cannot claim back VAT on business equipment, but was wondering about all the VAT she pays on products and raw materials each year.

I believe, for her type of business, the Flat Rate set by HMRC is 7.5%.

As I have no idea what all of this entails, I would appreciate any advice from members who are either already on this scheme, or know more about the ins and outs of it.

Thanks in advance.

Not been vat registered for a few years, but here goes.
The 7.5% payment takes into account the vat you would have reclaimed. With vat you deduct the vat that you have paid from the vat that you have charged, and pay the revenue man the balance.
So instead of claiming back input vat at 20% on 30k of purchases and then paying output vat at 20% on 60k worth of sales, she would just pay a flat 7.5% on the 60k.

If your daughter is on a high profit margin she will be quids in. If on a low margin then she will be worse of.

It begs the question if she is the best part of 20k below the threshold for vat, why pay it?

Thanks PW. It's becoming a bit clearer now (slightly! :smile: ). One of the areas she was hoping to make a saving in are the ebay seller fees, which include an obligatory 20% VAT. Since the seller fees also include VAT on postage, they amount to a hell of a lot over the period of a year.

I would assume that most ebay sellers are on a low margin, so she would probaly be worse off. If she were doubling her money, after postage and fees have been added to the cost of goods, she woulld be a few hundred pounds better off. Anything less than a double up and she would be worse of -unless she can add vat to her sales price- making her 60k + 20% vat = 72k. That scenario would usualy only apply if she was selling to businesses who could reclaim the vat.

There are generaly only 2 reasons for voluntary registration
1- to reclaim large amounts of vat on capital purchases ( but as you say this doesn't apply to flat rate)
or
2- if you are selling direct to businesses at low gross margin. If the customer can't reclaim the vat then the vat might outstrip your margin - making you more expensive.

Yeah, the more I read on the net about it (particularly in relation to ebay), the more I'm beginning to think it's a bad idea. I think she'll be better off just staying as she is. Thank for the quick response though PW.

At the end of the day you should talk with your accountant who does the books.

We are on the flat vat rate scheme, pay 7.5% in the first year and then 8.5% thereafter. It made sense for us to go on this instead of the 20%, It is a nightmare paying that vat bill each quarter, However now we are not watching every month if we need to shut up shop in case we went over the threshold and now we are full steam ahead with increasing sales, profits and turnover. I would wait until you get near the £85k threshold before going on it.

Are many or any of the items your daughter sells zero rated for vat by any chance?

We loved the flat rate vat of 7.5% until our landlord decided to add vat on the rent.
Book keeping is much simpler.
As a basic rule, your profit MUST be over double your vatable input costs to make it better from a vat point of view, but if your margin is lower, then worse off.
You can reclaim vat on equipement, - just have to put it down as a special purchase.