The Standard VAT Scheme allows you to claim back any VAT you have incurred on expenses.
For instance if you were to buy a computer costing £1,200 the first £1,000 of this is the fee paid to the shop for the computer with the additional £200 being the VAT that the shop will then pay to HMRC. You would then be able to claim this £200 back from HMRC when you file your VAT return.
Then Standard VAT Scheme is a very good system for businesses that incur a great deal of expenses that carry VAT. However most contractors & freelancers do not incur many expenses that carry VAT and it is therefore inefficient.
The following expenses do not carry VAT
- Director’s salary
The Flat Rate Scheme was introduced to simplify the operation of VAT and, because contractors have very few VAT carrying expenses, in nearly all cases it will save you more money than the Standard Scheme.
The Flat Rate Scheme works by way of you charging your clients VAT on the work you do at 20% – just like the Standard VAT Scheme - then instead of claiming back the VAT on your expenses, you get to keep a percentage of the VAT you charged your client.
The decision for which VAT scheme to join is up-to you as director. Majority of contractors choose the Flat Rate Scheme out of simplicity and tax efficiency. However if you feel you will have a high level of expenses that do carry VAT, the Standard Scheme may be better for you.
When you join The 123 Way we will review your business and offer you advice on which is the best scheme for you to join. We will then register you for VAT if you are not already registered and prepare and submit your VAT returns each quarter.