Very slightly less boring than it looks - yes, VAT
YES, IT'S about VAT, a member writes: "I write for a freelance editor who suggested that, like him, I switch to the flat-rate VAT system...
"This means, I think, that you don't have to add up the VAT you've paid on every paperclip and envelope - you just knock off a fixed percentage. This way, you can pay the VATman and still retain the will to live.
"What's the percentage for freelance hacks? And is it a good idea?"
The answer to the first question is: 12 per cent. That means that if you register for VAT and are accepted for the flat-rate scheme, you need to charge 17.5 per cent on all your invoices, and pay the Excise 12 per cent of all your turnover. (You may not charge VAT on exports or "removals to other EU countries", but that's a whole other can of worms.) You can't claim back the VAT you paid on anything, except capital purchases over £2000. (For details on how to find this answer and more for yourself, see below.)
A precise answer to the second question involves a morning with your accounts, a spreadsheet, a treble Espresso and a sack of frozen peas. But, as accountant Eric Longley notes: "My experience is that Customs and Excise do not give gifts of any sort. Usually traders find it financially beneficial to stay with the normal VAT rules even if it is a little more onerous on the record-keeping and compliance side."
The question individuals have to ask themselves is whether 12 per cent of their total gross income is more or less than the amount they would have to pay under the normal scheme, claiming all the VAT expenses, Eric notes. Or on the other hand - as he, being an accountant and all, doesn't note - whether they can do the arithmetic and retain said will to live. On a third hand: "You still have to add up every paperclip expense for Income Tax purposes so I see no great saving in the flat rate scheme."
If you registered for VAT by accident, or if your turnover is more than £56,000 and you had to register, then you may wish to consider whether paying more tax might be a fair price for less form-filling.
But digging up the answer to this produced a much better answer. You can apply to file VAT returns but once a year.
You still need to make payments on account, so Eric notes: "I do not see any great cash flow saving." He goes on: "if someone is smart enough to be able to prepare accounts for VAT on an annual basis, why not on a quarterly basis?" Because it hurts, Eric... This piece of news has inspired the Freelance to register before getting the next laptop, and save rather a lot. We'll let you know of any tripwires we stumble over.
You're a journalist. You're supposed to investigate your way to answer the question :-)
That'll be 25 minutes at ... oops, wrong hat.
Back to the real question: is it worth it?
Under the Flat Rate Scheme tax paid on purchases cannot be recovered and this was taken into consideration when the percentages were calculated. Input tax can however, be reclaimed on capital assets over £2,000.
Where was that will to live? I had one a moment ago...
SO, under the flat rate scheme:
- You charge VAT at 17.5% on your outputs (sales). And pay VAT at 12% on them to the Excise.
- You pay VAT at 17.5% on a rather large chunk of your inputs (purchases) and don't claim it back from the Excise, which you would if you were filling out returns, except that you can claim on single items over £2k.
Provisional answer: no way is this worth it, unless your turnover is such that you have to register and you hated filling out the forms more than
you liked the cheques that resulted, or unless all you buy is big
chunks of of expensive kit.
I may get around to the spreadsheet bit, one day. But I've paid thousands in VAT to avoid doing it over the past ten years, so don't hold your breath...
But there is some other good news. I didn't know about the application form to fill out forms annually, linked from www.hmce.gov.uk/forms/formsvat/formsvat.htm